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Reports that Verizon Communications Inc. is contemplating a move into Canada's wireless business have been met with skepticism by investors. While no doubt music to the ears of Industry Minister Christian Paradis – he of the floundering attempt to bring a viable fourth wireless competitor to every Canadian market – analysts have many valid doubts. But don't count out Verizon as a possible fourth player; there are several reasons to think this could be for real.
The arguments against Verizon buying an incumbent like Wind Mobile or Mobilicity are considerable. The start-ups, granted entry to the market by way of wireless spectrum that was set aside by the Canadian government, have weak network coverage and paltry market share. They lack capital and retail presence, as well as the big telcos' ability to bundle wireless services with other offerings, and have generated poor financial results. Canaccord Genuity telecom analyst Dvai Ghose figures that it would cost more than $2-billion to turn any one of them into a real competitor.
Now, consider the counterargument: in Saskatchewan, Manitoba, Quebec and the maritimes, regional fourth players are finding some success. That leaves three of the biggest and most promising markets lacking fourth carriers: B.C., Alberta and Ontario. The federal government seems uninterested in loosening foreign ownership restrictions that would enable the sale of one of the big three to a foreigner, but has lifted the restrictions on operators with less than 10 per cent market share. If Verizon wants in, it will have to buy small.
So far, the smaller players have struggled, achieving less revenue per user and lower penetration among high-value, data-rich customers than their larger competitors. Verizon, however, ought to be able to marshal strengths that the smaller carriers don't have.
Like all other big players in Canada and the U.S., Verizon's data business is growing fast as voice revenues tail off. If it bought one of the Canadian upstarts, Verizon would likely go after upscale customers in the data-rich markets of B.C., Alberta and Ontario with a different offering. Given its massive size, it would almost certainly be able to pass along better deals on smartphone handsets than the big three. Verizon would also be able to leverage its North America-wide network, and maybe even drop roaming charges for Canadians traveling in the U.S. . Add that up, and suddenly it's not so hard to imagine multinational Canadian banks, resource giants or manufacturers ditching their existing contracts.
The Canadian market may be small, but it is also less developed than other, more mature wireless markets such as the U.S. – and therefore offers more growth potential. Canadians have fewer wireless phones than Americans, fewer Canadian customers use smartphones and data as a share of wireless revenues in Canada lags that of the U.S. market by several percentage points. Verizon could not only try to steal customers from the incumbents, it would also be positioned to capture a sizeable share of the growth to come.
These talks are early and deposits for the upcoming spectrum auction – which Mr. Paradis implied would be friendly to the upstarts – are due in just three months. Still, though the odds against Verizon coming to Canada are long, they may not be as long as people think.
Editor's note: the author owns approximately $315 in Verizon shares, accumulated through dividend reinvestments from past holdings.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .
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