A new national cellphone company is unlikely to drive down prices for consumers as it fights its way to profitability, Moody's Investors Service said as it predicted that it would cost Verizon Communications Inc. close to $3-billion to expand into Canada.
Much of the discussion surrounding Verizon's potential arrival in Canada has been around whether it would mean less expensive plans for consumers, as the country's existing players are made to compete against one of the largest wireless companies in the world.
But Moody's says this is unlikely – Verizon is considered a premium offering in the United States and Canada already has low-cost options for consumers looking for a scaled-back plan. In other words, Verizon would have nothing to gain by triggering a price war with Canadian incumbents.
"If Verizon or another company did invest in Canada, we doubt it would start by launching a price war, primarily because it would not have an established local network," the report states. "Lacking the local cost structure to support a discount offering, a newcomer would have nothing to gain from a price war, as the existing companies could always go lower."
Instead, the companies are likely to compete on services. Roaming packages that allow customers to easily use their phone's existing plans when travelling between Canada and the United States could be a particularly fierce battleground, suggested industry analyst Mark Goldberg, as Verizon looks to steal customers who frequently cross the border.
"There are some marginal areas where they can differentiate themselves," he said. "Cross-border roaming is an obvious area they'd likely focus."
Moody's acknowledged Verizon could buy an existing provider such as Wind Mobile, Mobilicity or Public Mobile, but would still need to spend upwards of a billion dollars to improve their networks to create a true national player. If it were to acquire all three and improve the networks to the point where they could compete with companies such as Rogers Communications Inc., BCE Inc. and Telus Corp., the price tag could top $3-billion.
"A newcomer would still need to make a significant investment in any of the three smaller carriers to get started," the report states, adding "costs could escalate materially" for the carrier because it would also need to buy spectrum at an upcoming auction if it hoped to expand its network.
The existing carriers argue that the upcoming auction is tilted against them, because Verizon would be entitled to buy two out of four blocks of available spectrum (the airwaves used to send wireless signals). They are also upset that Verizon would be allowed to buy the smaller carriers, something they are not allowed to do.
But together, the Canadian companies command a 90-per-cent share of the market. Moody's said it could take Verizon up to five years to turn a profit on its initial investment, assuming it managed to grab 15 per cent of the market and that its average revenue per user came close to matching the established players.
"While we believe a newcomer could build a successful wireless business, many steps are required to formulate a viable business plan and returns are likely to be more limited than the relatively low Canadian penetration rate might suggest," the report stated.
Verizon's potential arrival has sparked heated debate among Canadian telecommunications companies, which believe the company is getting special treatment, and the federal government, which believes the existing rules will help bring more competition to the industry. U.S. consumer advocate Ralph Nader even waded into the debate Thursday, with an open letter to Prime Minister Stephen Harper in which he calls the company a "tax dodger."
"Question: Why would you allow one of our country's most aggressive tax dodgers, a company with a track record of overtly ripping off our government, into your country," wrote Mr. Nader, who has run for president five times. "What's bad for the United States will be bad for Canada."