VANCOUVER – Okay, so Telus CEO Darren Entwistle didn’t say exactly what it says in our headline above, but that’s the gist we gleaned from the legendarily loquacious chief executive after the company’s second quarter conference call with financial analysts on Friday. Let us explain.
In the second half of the call, Entwistle was asked if he was concerned about regulatory intervention on wireless pricing by Scotiabank analyst Jeff Fan. The topic has been hotly discussed in the wireless industry of late, especially since a letter which the CRTC sent to all players two weeks ago expressly talked about rate regulation.
His meandering answer, however (we’re not going to explain his “topology of the triangulation,” theory here, but you can click to listen to the call yourself, if you wish), showed he believes the business is now in a “moderating ARPU environment,” meaning growth in the average revenue per unit, is declining and will slow more in the future. Which seems to us to mean pricing increases here have hit a ceiling.
Entwistle reminded though there is still ample room for wireless growth on the volume side, since wireless penetration is at about 87% here while other countries are well beyond 100% since many people own multiple devices and pay multiple bills, or now have both a work device and a personal one. The Canadian industry, he explained, will “take that from 87% to 100 to 110 and 120 and enjoy volume-based growth rather than price increases and unit based accretion at the ARPU level.”
Large rates of ARPU growth, he warned analysts, can not continue indefinitely, in part because it “invites more and more and more government intervention, and I think we’ve shown as an industry that we can make a lot more money for shareholders and do a lot better for customers through strong, competitive intensity amongst the players of the industry versus near term profit aggrandizement that invites regulatory intervention which is much more punitive to the valuation characteristics of our business.
“So what I’m saying here is to be mindful of inviting that eventuality by being overt in our expectations that ARPU accretion can’t happen on an endless basis.”
However, Telus and others will be able to drive serious growth by capitalizing on the continually growing demand for data through all of the new, connected technology coming on line and the myriad more on the way. Noting that “a single human being frequently now has a multiplicity of revenue generating devices” and the machine to machine world is still in its infancy, “I think we, responsibly, in a more moderating ARPU environment, even in a static environment, we have lots levers to pull to improve the ARPU to AMPU (average margin per unit) flow-through in terms of micro-cost management and lots of learnings and levers to pull in terms of cost transformation at a macro level that can give us a richness of EBITDA growth on the wireless side of our business for a very, very, very, very long time without the necessity of material increases in ARPU to buttress it.”
“I would say the competitive intensity is not just healthy, but bordering on the irrational.” – Darren Entwistle, Telus
So, growth will come from huge increases in devices and Internet of Things and data traffic, but not revenue per user.
However, while Entwistle seemed to chafe at how Canadian wireless companies are negatively portrayed by many Canadians, he also seemed to recognize that if the wireless industry doesn’t moderate its ARPU, or pricing, there is a real chance of government stepping in.
He noted the Canadian market has “more competitors in the wireless industry… than just about any country in the world… and the intensity of competition negates the need for regulatory intervention,” he said.
He then pointed to first half of the fiscal year “when you have three weeks out of 26 where you don’t have a rate-based promotion – we did have a device-based promotion in those three weeks – and 23 weeks of extremely aggressive data promotions, I would say the competitive intensity is not just healthy, but bordering on the irrational.”
Entwistle also talked about various packages being offered which address the issue of affordability for low income Canadians which are “ranging from $25 to $30 for 500 Meg to 1 Gig, and a number of those rate plans give you access not to just a limited geography but to a strong national network amongst the established players (so) I would say wow, in terms of the affordability component, tick that particular box.
“What I’m saying is we should price for the long term in this industry, not for the short term, that we should price reflective of not just of the P&L but the balance sheet given the capital amounts we spend on spectrum and network technology that keeps getting exhausted rolling over and over and over,” he continued, “but we shouldn’t do it in a level that’s egregious, we should do it at a level that allows us to make a reasonable return so that we’ve got the money to invest for the future in terms of new technologies that come along.”
