On a spring day in 2004, executives from Verizon Communications Inc. politely informed a board meeting of Telus Corp. in Vancouver that they'd had a change of heart: Their company was done with Canada.
As corporate breakups go, it was an amicable one. The American giant's 20-per-cent ownership stake in Telus had served both companies well. The CEOs were allies; then-Verizon boss Ivan Seidenberg was known to join Telus's Darren Entwistle on conference calls with analysts, just to show his support.
But Mr. Seidenberg had better things to do with the money that was locked up in his friend's company. The Canadian telecom market was getting bigger, with the rollout of faster networks and new smartphones, but the U.S was growing more quickly and was more lucrative. For Verizon, home was where the action was and where investment was needed. Months later, it completed its sale of Telus shares for $2.2-billion.
Nine years later, Verizon is looking hard at Canada again – and the circumstances couldn't be any more different.
If the U.S. company returns to the market, it would be as a potential aggressor – a threat to the dominance, or at least the profits, of Canada's three wireless giants: Telus, BCE Inc. and Rogers Communications Inc.
Verizon's overtures to buy up small and struggling wireless companies like Wind Mobile and Mobilicity take advantage of a new rule that allows foreigners to acquire telcos with less than 10-per-cent market share. If the deals come to fruition, it could mark one of the biggest shifts Canadian telecom has seen in decades.
With a $700-million (Canadian) preliminary bid to buy Wind, exploratory talks with Mobilicity, and an opening to bid in an upcoming auction of wireless spectrum, Verizon is angling to be more than just a passive investor this time around. It wants to be a player.
Two crucial things have happened in order to attract the company's interest. The U.S. market has reached a saturation point, with cellphone adoption at more than 100 per cent, meaning there is more than one handset for every adult in the country. Canada, at about 80 per cent, still has some growth left.
The bigger change has come in Ottawa, where the Conservative government has bet political capital on a policy of bringing new competition into the wireless sector, and has gradually warmed to the idea of allowing a large foreign telecom company set up shop.
Having opened up the wireless sector to new competition about five years ago, only to see ambitious upstart companies like Wind, Mobilicity and Public Mobile fail miserably against the Big Three, the government wants to see a viable fourth player in every region more than ever.
If Verizon does set up shop in Canada, it will disrupt the wireless sector like never before – adding the most deep-pocketed competitor the sector has ever seen. But Ottawa may not necessarily get the outcome it so desperately covets: lower prices for consumers. Because as Canada's phone companies know well, and as Verizon has shown in the U.S., you don't get to the top of your industry by engaging in price wars, and by giving away the service at bargain-basement rates. In wireless, profits are a long-term game.
Trojan horse or white knight?
Based in New York, Verizon is a product of the wave of consolidation that swept through the U.S. telecom sector in the late 1990s.
Formed through a merger between two of the oldest and largest American phone companies, Bell Atlantic Corp and GTE Corp., Verizon made its debut in mid-2000 as the main rival to AT&T and Sprint in the battle for U.S. cellphone subscribers.
The name itself means nothing – it is a linguistic mash-up dreamed up by marketers who wanted to combine the optimism conjured by the word "horizon" with the reliability implied by the word "veritas," the Latin word for truth.
Inside the industry though, Verizon is known simply as Big Red, a nod to the colour of its logo and its sheer size. At last count, Verizon Wireless had nearly 99 million wireless subscribers, which is roughly a 34-per-cent share of the U.S. market, ahead of AT&T and Sprint.
Verizon Wireless – a joint operation that is 55 per cent owned by the parent company and 45 per cent by Vodafone Group PLC of Britain – is the jewel of an operation that also sells Internet, television and home phone service. The wireless business operates the largest 4G LTE network (which stands for fourth-generation, long-term evolution) in the U.S., putting it at the forefront of the smartphone revolution.
The company has expanded through acquisitions in the U.S. and has built its name on the reliability of its wireless services.
Last year, it rolled out a "Share Everything Plan," a strategy that has since been copied by Canadian carriers. The idea is to allow subscribers to share large amounts of data among multiple devices, including smartphones and tablets. For example, a family with two smartphones and one tablet can eat up four gigabytes of data a month, and talk as long as they want, for $160 a month before taxes and other surcharges. The strategy is not necessarily revolutionary, but it is aggressive, and it has resulted in lower customer turnover – something every wireless company fights for.
As a result, Verizon's total churn, a measure of how many customers leave the company, was a paltry 1.3 per cent for the first quarter – which some say is a direct reflection of Verizon's ability to also heavily subsidize the hottest smartphones. A report by ABI Research found that "the average U.S. implied subsidy" for Verizon devices averaged $447 – which is $40 more than the industry average per smartphone.
Verizon Wireless has the efficiency and scale to ensure it can "at least break even" by the end of a contract, said ABI senior practice director Nick Spencer.
By any measure, it is truly a massive company. With a market capitalization of $147-billion (U.S.), it is one of the 20 largest public companies in the U.S., bigger than Cisco Systems Inc., and about twice the value of Rogers, BCE and Telus added together.
That has left analysts asking what impact it might have. Though the company would theoretically only be buying up the tiny assets of Wind and Mobilicity (assuming either of those deals go through), would it be content as a bit player in a small country?
One theory is that Verizon's expansion into Canada would be merely to provide a cross-border infrastructure for its U.S. operations – cheaper rates and more flexibility for its American customers when travelling to Canada's major cities.
But some analysts believe it would have grander aspirations, particularly with the government encouraging a fourth competitor that can put downward pressure on industry prices. To get there, however, Verizon would have to strike a network-sharing deal or spend heavily to build out a Canadian network to become a coast-to-coast player, something that could take years.
Martyn Roetter, a Boston-based telecom consultant, says it is unclear which version of Big Red might emerge in Canada – the aggressive company that likes to dominate the U.S. market but has also angered consumers for its habit of adding extra fees to bills, or a niche player quietly testing the waters of international expansion.
"If I look at Verizon in Canada, an obvious question is, will they, once they get in there, start acting the way they do in the U.S.?" Mr. Roetter said. "Or will they act like a scrappy entrepreneurial entrant who really tries to do things in a different way and provide more options?"
Canadian telcos are eager to portray Verizon in Ottawa as the American invader that won't come in and lower prices for consumers, but will cash in on the plump margins it can wring from Canadian subscribers, while forcing the industry to spend more on marketing.
Adam Shine, an analyst with National Bank Financial, suggests Verizon could emerge as either "the government's white knight" or possibly its "Trojan horse" in the effort to stimulate sustainable competition in the sector.
For its part, Verizon is being quiet about its plans. Other than confirming a few weeks ago that it was indeed looking at opportunities in Canada, Verizon executives have said little more.
"This is just us dipping our toe in the water," Verizon's chief financial officer Fran Shammo said after The Globe revealed that it was in takeover talks with Wind.
Verizon a challenge for Big Three
The politics behind Verizon's possible return to Canada are decidedly populist. The government may welcome its arrival in the belief that Canadians will be comfortable with opening up the sector to a big U.S. player if they get lower cellphone bills in return.
There are some 27.4 million wireless subscribers in Canada. And at any given time, there are roughly 10 million customers who are considered "free agents" – either because they are not locked into longer-term contracts or are using pay-as-you-go plans.
As the wireless market matures, and more people upgrade to data-hungry smartphones, the fight for customers has become fierce. Prices have been coming down: A study released this week found that Canadian wireless prices have decreased 18 per cent since 2008. The report was commissioned by Industry Canada and the CRTC, and Industry Minister Christian Paradis did not miss an opportunity to trumpet the report's findings. "We will not hesitate to use any and every tool at our disposal to protect consumers and promote competition in every region of the country," he said.
To achieve its goal, the government has taken a number of steps, cementing its authority on spectrum transfers between wireless carriers and relaxing foreign investment restrictions for small telcos – a change, introduced last year, that gives Verizon its gateway back in to Canada.
But would Verizon drive prices significantly lower in Canada? South of the border, Verizon is hardly a low-end player. It primarily targets the most lucrative smartphone users – ones with voracious appetites for data.
"As a premier carrier in the U.S., we don't expect the company's modus operandi to shift dramatically in Canada, especially if it's looking north for incremental growth, let alone a reasonable return on the more than $2-billion it's likely to spend over the next 12 to 18 months to establish itself here," wrote National Bank Financial's Mr. Shine.
As a big carrier, Verizon has done plenty to raise consumers' ire. This spring, it announced that customers would have to wait longer to upgrade their subsidized smartphones on two-year contracts. And much like its peers, it also charges so-called "below the line fees." That included an "administrative fee" of 90 cents and a regulatory charge of 16 cents, according to published reports from late May.
Although those amounts are relatively small, Americans find them irksome. "It is pure bloody profit, and it costs them nothing. And that is the sort of thing that they get away with," said telecom consultant Mr. Roetter.
Nevertheless, a Verizon entry could still have a meaningful impact on the bottom line of the Big Three, whose shares tumbled last week on a Globe report of the U.S. company's Verizon's early-stage proposal to buy Wind.
Verizon has already drawn up some preliminary plans, including how it might remove one stumbling block to completing a Canadian deal – Wind's core network infrastructure, which was built by Huawei Technologies Co. Ltd. The Chinese telecoms gear maker, which is founded by a former member of the People's Liberation Army, is the ultimate bête noire for Western governments due to allegations that its equipment is designed to allow espionage or sabotage foreign communications systems.
Though Huawei has always strenuously denied such claims, Verizon could win points in Ottawa by proposing to simply rip out Huawei's equipment from Wind's backbone network, a move that could cost up to $100-million, according to sources familiar with the matter.
Wind and Mobilicity together have about 850,000 customers, giving Verizon only a modest foothold in Canada to build from. The U.S. company would be forced to spend heavily on marketing, spectrum and equipment to create a viable business here. "Verizon would need to quickly invest to upgrade the networks it would be acquiring," Mr. Shine said.
"I think a few companies would be happy to sit back and watch Verizon blow its brains out," said one source close to Rogers, who spoke on condition of anonymity.
At the very least, a major push by a company of that size will cause revenue pressure for the incumbents, which could instigate cost cutting in the industry, Mr. Shine said. "This will mean significant layoffs, which could easily trump the hiring to be done by Verizon."
The veteran communications analyst figures that Verizon may have the upper hand in lowering prices for smartphones – given the scale advantages it has on buying them in bulk – but the Canadian incumbents will be able to bundle more services together, such as Internet and TV, offering discounts to keep their customers out of Big Red's hands.
There's another aspect to Verizon's proposed Canadian expansion that could be the most problematic for the Canadian companies: its presence in in upcoming auctions of wireless spectrum.
The 700-megahertz frequency, which will be auctioned off in January, is considered especially valuable because it is well suited to carry wireless data traffic, such as mobile video.
To ensure that at least four competitors will be able to buy wireless licences in each region, Ottawa plans to limit the amount of so-called "prime spectrum" that incumbents can purchase. Specifically, incumbents are capped at one prime block, while new entrant carriers can bid on two blocks. If Verizon bids, it would qualify as a new entrant carrier.
"We're prepared to compete with them, but we want the ability to compete for the same amount of spectrum," said Mirko Bibic, executive vice-president and chief legal and regulatory officer for BCE Inc.
Given there are only four blocks of prime 700 spectrum, "there is a risk" that one of the big three incumbents could get shut out if Verizon is able to bid for two blocks. "One of the three incumbents likely will be unable to acquire 700 MHz spectrum," added Mr. Bibic.
That is "particularly troubling," because Canadian incumbents would never enjoy such preferential treatment south of the border, he said.
"It is not like the U.S. government is saying to any of the Canadian wireless players, 'Hey, come get spectrum in New York; come get spectrum in Chicago, Miami, Phoenix, L.A. at an advantage over [Verizon], AT&T and Sprint."
But the U.S. has never wanted a serious new competitor to emerge the way Ottawa needs one. And for those reasons, Verizon is no longer done with Canada. It may only be getting started.