TORONTO – With subscriber additions at Wind Mobile, Public Mobile and Mobilicity well below what many had hoped, is the model failing?
That’s what Canaccord Genuity telecom analyst Dvai Ghose asked on Monday in a research note to clients. Noting the departure of Mobilicity CEO Dave Dobbin is the second new entrant CEO to leave over the past six months, Ghose wrote what many have been saying for some time now: This isn’t how is was supposed to be.
“Independent new entrant subscriber growth has been weak — WIND only added 41k net subscribers in Q3/11, down from 45k in Q2/11 and 46k in Q3/10,” writes Ghose.
“It ended September with 358k customers despite launching at the end of 2009. While Mobilicity stated on Friday that it ‘has attracted over 250k customers,’ this refers to gross subscriber additions since launch in May 2010. We estimate that it had 160k subscribers at the end of Q3/11. Public Mobile had 150k. We estimate that the three together had 668k customers, or only 3% share at the end of Q3/11, although they accounted for an estimated 22% of industry net additions in the quarter.”
All three new entrants tried various ways to differentiate themselves through low priced unlimited voice and data and no contracts in return for unsubsidized devices. “While consumers dislike complex and expensive incumbent price plans and contracts, they have also shown an unwillingness to buy unsubsidized devices,” says Ghose’s note (as Wind CEO Anthony Lacavera noted here). “So independent new entrants have had to start subsidizing. With 1) ARPU [average revenue per customer] of $25-30; 2) estimated churn of 4%; and 3) estimated COA [cost of customer acquisition] of $400+, we assume that Mobilicity and WIND's lifetime revenue per subscriber is only $750 or less, and that COA accounts for 50%+ of lifetime revenue. Canadian incumbents, MetroPCS and LEAP only have a COA of 10-20% of lifetime revenue.”
This, quite obviously, is not sustainable.
Ghose wonders if the federal government will set the rules of the upcoming 700 MHz spectrum auction in favour of the incumbents or newcomers.
Ed note: While Wind’s billionaire financier Naguib Sawiris said last week that it would not participate in the 700 MHz auction unless spectrum is set aside for new entrants, this is thought by many to be part and parcel of the full-court press of lobbying from all sides going on in Ottawa.
According to Ghose, however, Sawiris’ comments “reflects concern that Industry Canada will opt for an incumbent spectrum cap rather than a set aside.” (Ed note: This is part of what Cartt.ca has been hearing, too).
“With only three valuable 700 MHz blocks available and three national incumbents, we understand this concern,” continues Ghose. “Liberalizing foreign ownership restrictions now also appears a low priority for the government. Given 1) subscriber and subsidy challenges; 2) regulatory issues; 3) capital markets challenges; and 4) the need to spend millions of dollars to upgrade to LTE, independent new entrants may be facing ‘a perfect storm.’ However, this is also a problem for Industry Canada, which is committed to fostering more wireless competition.”
Ed note: And without strong competitors to the big three (and newcomer Videotron is a regional play only, Shaw has pulled out of building wireless and regional player EastLink has yet to launch), the hopes for more strong, national, competitors seems out of reach, unless a couple of the new companies, perhaps, merge.
Unless the federal government does decide to open up our borders to more foreign investment in the sector – which is something else Cartt.ca has heard from several sources just may be in the offing after all. But really, the Prime Minister’s Office (and the PMO would be where such an edict would originate, given the fact the Telecom Act would need changing) isn’t exactly an open faucet of communication, so it’s hard to say with any degree of certainty what, exactly, is up.
Writes Ghose: “In our view, the incumbents were guilty of arrogance in their regulatory approach to the AWS auction and perhaps got what they deserved. However, they seem to have learned from their mistakes. The big trump card being used by the incumbents in Ottawa for 700 MHz is ‘bridging the digital divide’,” he says. “Bell, TELUS and Rogers have said that they will deploy LTE on their AWS spectrum in urban markets, and Bell and Rogers have already launched some LTE markets. This helps show the regulators that they are not merely hoarding AWS spectrum, even though U.S. carriers are generally deploying LTE at 700 MHz. In addition, the Canadian incumbents have said that they will only deploy LTE in rural markets and help bridge ‘the digital divide’ if they have good access to 700 MHz spectrum, as it is prohibitively expensive to deploy LTE in rural areas in higher frequency bands such as AWS.
“Of course, the incumbents could still deploy LTE in rural markets at their existing 850 MHz cellular bands, but we believe that their rural argument is winning support in Ottawa,” he adds. “The bedrock of support for the current Conservative Government comes from rural voters. Consequently, given that: 1) the incumbents have tied rural LTE deployment to access to 700 MHz spectrum; and 2) none of the new entrants can really afford to concentrate on less profitable rural deployment at this time, we believe that the incumbents may be winning the argument for caps for incumbents versus set asides for new entrants.”
Until Industry Canada sets the long awaited, overdue rules for the 700 MHz auction though, all this is just guesswork.
– Greg O’Brien
