TORONTO – While more and more Canadians opt for smart phones like BlackBerry’s, iPhones and Android-powered devices, increased competition in the market is going to hurt the incumbent wireless operators’ bottom lines, says a new report.
Toronto’s Convergence Consulting forecasts a Canadian wireless service ARPU decline of 1% for 2010 (ARPU saw a 3% decline in 2009), driven by a 7% drop in voice ARPU (2009 saw a 9% voice ARPU drop). While data service ARPU will grow by 26% in 2010, the company estimates, that will not be enough to counter overall ARPU decline according to its report ‘Canadian Wireless 2008-2014: Assessing the Impact of New Entrants’.
The importance of data continues to drive the incumbents (and will ultimately drive the new entrants) to upgrade their networks to support higher speeds.
The report says smart phone/data device subscribers represented 22% of the Canadian market at year-end 2009, and is forecast to be 31% by year-end 2010, and 60% by year-end 2014. These subscribers are driving revenue growth and bring in on average approximately twice the ARPU of just voice subs.
With four of the six key new entrants having launched, as well as Bell re-pricing Solo and Rogers launching Chatr, both data and voice pricing are clearly under attack. New entrant combined voice/data prices can undercut incumbents and their flanker brands by more than half, (or up to 75% when just comparing data), while incumbent flanker brands can undercut incumbent voice pricing by more than half.
Based on its detailed subscriber models, Convergence forecasts that new entrants will have 6.05 million or 18.6% of Canadian wireless subscribers by year-end 2014, while overall Canadian sub additions will average 1.9 million per year from 2010 to 2014, as opposed to 1.5 million between 2005 and 2009, mainly due to lower prices.
Lower wireless prices will also spur wireless substitution (wired phone cord-cutting), which the report forecasts will grow to 28% by year-end 2014, up from 9% at year-end 2009.
Excluding spectrum expenditure, the report estimates that all new entrants will be EBITDA positive and have positive free cash flow by the end of their third year of operations. The company says there should be positive cumulative pre-tax free cash flow for Shaw, Videotron and EastLink by the end of year six; but Globalive/Wind, Mobilicity, and Public Mobile, will realize positive cumulative pre-tax free cash flow by the start of year ten.
Acquisitions of newcomers likely
If the new entrant wireless independents do not sustain lower prices, they will not gain a significant number of subscribers, however, reads the report. This issue, combined with the high capital burn rate, makes being acquired highly relevant. Hence, a strategy of doing as much market share damage as possible in contrast to the current ‘rationality’ of the Canadian wireless market place is surely a dynamic to watch.
By year-end 2010, Canadian cable providers will have 32% of the local residential wireline telephone market, up from 6% at year-end 2005.
That success has come from the ability to leverage their customer base, (especially up-selling to those customers that take TV and/or Internet), competitive pricing, especially in a bundle, the convenience of one bill and provider, and, no trade-off in the quality of telephone service offered, continues the report.
New cable wireless entrants will likely show a repeat performance based on the same four components, as well as other factors. Non-cable wireless new entrants will also realize gains, though less than half as formidable on a per capita/coverage basis as new wireless cable entrants.
Incumbents will grow best in their wired footprints
By year-end 2014, Convergence says Alberta/BC and Quebec will see the most market impact from new entrants. Over 2011-2014, Bell, Rogers and Telus will gain more consumer wireless subscribers in their traditional residential wireline telephone and cable footprint regions, than out-of-region. Out-of-region, without competitive multi-product consumer offers or deep price cuts, incumbents and their flanker brands will find it challenging to compete with the bundled consumer pricing and overlap of a new cable entrant or the regional incumbent carrier which will be fighting to preserve growth, as well as the competitive pricing of the non-cable new entrants.
That being said, due to their respective price points, Rogers’ launch of Chatr, its new discount unlimited mobile phone brand, and Bell’s launch of Solo Unlimited plans, should help both players out-of-region, though they still face impediments in competing against aggressive data pricing and multi-product offers, says the research.
Rogers has the most potential exposure, with approximately 60% of its consumer wireless subscribers out-of-region, (where it does not offer cable services), primarily in Alberta, BC and Quebec, followed by Telus with about 50% of its consumer wireless subscribers out-of-region, (where it does not offer residential wireline telephone), primarily in Ontario and Quebec.
