IT’S PRETTY UNUSUAL for dropped cellular phone calls to be mentioned in a Speech from the Throne.
But, that’s exactly what happened last fall when Saskatchewan Lieutenant-Governor Gordon Barnhart said in that speech that “improving digital and electronic infrastructure is essential to the new economy,” and that “(d)ropped cell phone calls are still a problem, despite an increased investment in SaskTel’s 4G network of $170 million in my government’s first term.”
SaskTel’s ownership – the taxpayers of Saskatchewan – is a holdover of the past, when many telcos were government-owned. While its competitors feel competing against the government is unfair, the people of Saskatchewan aren’t exactly clamoring for it to be sold. And besides, when network issues like the ones the company faced late in 2011 caused Premier Brad Wall to make an immediate commitment to $175 million more in spending to keep up with connectivity demands, it would be hard as a mobile user to dislike that type of rapid response.
As you’ll read, data consumption is growing in Saskatchewan as quickly as it is everywhere else in Canada and the massive growth caught SaskTel somewhat off-guard in 2011 leading to large numbers of dropped calls and slow data speeds on their net.
According to CEO Ron Styles (pictured below), who recently sat down for an interview in Toronto with Cartt.ca editor and publisher Greg O’Brien, those problems have been solved and the company plans to sink millions more into its capital expenditures to spread wireless and fibre as far and wide as it can, as quickly as possible.
What follows is an edited transcript with the CEO, who joined the company August 15, 2010, the same day it turned on its 4G wireless network.
Greg O’Brien: Did it take you long to get up to speed on the telecom world?
Ron Styles: I came from CIC, Current Investments Corporation, the holding company for all the Crowns and had a bit of a background already in the strategic plan for SaskTel, so I knew a little bit about the industry, but it was always at a high level, so moving in, yes, I had to get up the curve pretty fast. You have to get to know the people and the networks as quickly as possible.
And then the technology is changing so fast. I think everybody has to really press themselves to make sure they're picking up the nuances of what's changing and bring in some of those changes as well. It's been an interesting experience… I really enjoy the company. It's a big company in a Saskatchewan context with 4,000 people, but it's a small company in the sense of people know themselves very well. The culture is a very friendly one. I've really enjoyed myself with SaskTel so far.
GOB: Well, let me ask you the question that's top of mind for everybody… about the 700-megahertz option. What do you think of this auction, of the rules that may or may not be announced soon? (Ed note: This interview was done prior to the March 14 auction announcement.)
RS: This is a very critical auction for the entire industry and for SaskTel. For us, 700 spectrum is an integral part of our being able to service rural or remote areas in a significant way. (Building) penetration is great for the product, but on top of that… in terms of distance, is going to be critical for us to improve our operation and our service. Spectrum's at a premium right now and with the amount of data people are trying to put over the spectrum, the more you have – the more effective you can be.
We also look at it a little bit from a public policy perspective, and we think… that this spectrum has to be put out in such a way that people have to make use of it. You shouldn't be able to buy it and put it on the shelf for a decade or something. It shouldn't be treated as simply an asset that you can buy that you might wheel and deal on the market. So whoever gets it, there should be a requirement that you've got to deploy it within a couple of years.
GOB: How are you fixed for spectrum right now? How big of a crunch is it for you with what you have now and what you’re rolling out?
RS: I think we’re like everybody in Canada right now. There's what we expected would be required for the 4G network, and then there's a reality of the amount of data that's being pushed over the network now. So, you can address carriage requirements in a couple of different ways. One is obviously a spectrum, but the second is with more towers and it's always a bit of a balance. Now, spectrum at the right value is a much more efficient way to go, and in some locations, it's the only way to go, especially in rural areas. We would like to get our hands on more spectrum; no doubt about it.
Spectrum will even become more important when we roll out LTE as well. We're then going to be trying to provision two networks, in effect, and everything that you read in the papers right now – we believe this is the case in Saskatchewan from what we've seen as well – tells you that you're going to see a doubling of the amount of data on the networks.
So yeah, we need more spectrum. If we don't get it, we'll have to approach our business in a different way. These things all have an effect on the consumer, and I think sometimes that connection is not recognized by the federal government. By driving up the price of the spectrum, you're driving up the prices that are out there in the marketplace – and there seems to be this misinterpretation that simply by getting more spectrum out there to more entrants, that somehow that's going to lower price. But no, it's the price of the spectrum. If you get it at a lower price, obviously that's going to have an impact on your rates.
GOB: And you need the spectrum in all areas as well because the user in say, Tisdale or Porcupine Plain or something will often times want the same performance as the user in Regina.
RS: Absolutely. And that's another thing around 700 where an urban person is going to do most of their business in that particular centre, and they're going to have good coverage because the population density, etc. Take Porcupine Plain, though. They may do a large part of their business in the surrounding area. So coverage becomes much more important just to their daily lifestyle, which is another good reason why 700 needs to be deployed. So whoever's going to buy it, again, my view is they have to deploy it. And I’m not making a pitch that it's just SaskTel. Whoever wants to come in the province, our position, the government's position, is that's great. But again, you have to deploy the spectrum.
GOB: Leaving aside what is “rural”, I can point to you places that are less than a two-hour drive from (Toronto) where there's no cell coverage.
RS: It's hard to fill all those pockets. You can see the impact, I think, in the States when you go to some of the major cities down there where they're having pretty significant capacity problems… You're seeing some of it across Canada as well, and spectrum will help to reduce some of that and we'll continue to provide the services.
GOB: Now, SaskTel has had some issues, too, late last year with that. I think I wrote that it was unusual to have dropped calls mentioned in a government’s throne speech… and around the same time, your CTO was let go and a few other people were let go. Are you over that hump now? How do you address what Premier Wall had to say at the time?
RS: Let me start with network performance. Like everybody else, we were surprised by the amount of data people were trying to move over the network. Just to give you a bit of an example, with our radio network controller. We expected to put a second one in on the network in 2012. Well, we had to put a second one in during the summer of 2011, and we've got two more on the way. In fact, two more have been delivered and are being installed.
The amount of data simply is a lot larger than anybody expected, and we had weeks where data growth was 5%. I mean, it just speaks to something that was a little unexpected for us. We started running into problems about mid-September. I think we responded very quickly to that. By mid-November, our dropped calls were down to 1% and our failed calls were down to 2% on a network basis. So I think we responded very quickly. People in Saskatchewan, well, they voiced their concerns, recognized that we were responding, and we got the network back to a performance level I think the people are very happy with.
Now we still have challenges going forward, and I say that because we're going to add another 170,000 (wireless) customers in 2012, and that means you've have to have a lot more capacity… So this year, as an example, we budgeted another $53 million for capacity enhancements. I'm pretty sure we'll add another $20 million to $25 million to that, and we still have another $43 million planned in 2013.
This is an ongoing issue, and when it comes to each community location, we simply need to keep a very close eye and add… whatever capacity might be required. Our focus for the next year, year-and-a-half is strictly going to be on capacity, not really coverage. Once we get to a point where the system stabilizes, our interest is maybe expanding coverage a little bit more as well, to hit some areas where it isn't quite as robust as we might like right now.
GOB: Now is that just wireless or wireline as well?
RS: That's wireless. The other thing we're doing on the wireless side is an LTE build which we started last year. We're actually rolling out the first phase of it in the fall of 2012 (in Regina and Saskatoon only). And then we'll be doing a rural deployment starting in 2013. The real key here is LTE will take some of the loads of data traffic from 4G – so it's part of the 4G solution. It's not just about better technology or faster technology, but it's about the entire set of wireless networks and what we need to do to keep them in high performance.
On top of that, we're also rolling out fibre to the premises, and we got a start on that in 2011. We've done a couple thousand in Regina and Saskatoon, plus we did a set of dormitories for the University of Saskatchewan and we're sorting our way through the deployment right now. We put out a large RFP in November or early December last year and we'll sign some contracts probably within the next month to have a couple companies coming in, and we hope to pass about 40,000 homes in 2012, connect up around 24,000 customers, and that'll get us our real solid start to do a complete fibre deployment. Now fibre for us is important to us for two reasons. One is that it's really the backbone for wireless.
GOB: For sure, when most people think of wireless, they think, "Why put fibre in?” But if you don't have fibre, you don't have wireless.
RS: That's exactly it. It's not just about doing something different to the home in wireline, but it's also about doing something for wireless. One thing that keeps our wireless network in good shape is our entire wireless network is hooked up to fibre. It's not radio links or anything else, so we're in a very good shape right now to manage a large growth of data.
It's also important for us from the perspective of competition on the wireline side, which is cable – and cable has got a good product. By moving to fibre, we'll have a product that is better than cable in my perspective. It'll be faster, with more bandwidth, and it's future proof.
We're going to come out with a couple of products at 100 megs and 200 megs, but we also know that in the lab they're doing a gig right now, and at some point in the distant future, we'll be able to move from 200 to 300 to whatever is really required by our customers. So it's going to future-proof the network, but it's also got an operating side that's very important. Large parts of our copper were deployed in the late 1950s, 1960s. It's getting old. We have a lot of breaks that occur from time to time, so we're going to be able to bring down our maintenance costs as well. It’s very important to keep your cost side under control, so the fibre deployment's important for a whole variety of reasons. It'll also improve our IPTV product. It's a great product right now. We are the first in Canada to deliver high definition.
GOB: Are you at 100,000 subs with Max now?
RS: Just about. We're closing in pretty fast. We had a great year last year; I think it was about 8% growth. So we're doing well, but again, this will improve it. I've seen high-def on copper, I've seen high-def on fibre, and I can tell you. It looks much better. So those are all things that are going to help secure our future and improve our competitiveness in the marketplace.
GOB: How would you describe the competitive market in Saskatchewan in general – on the wired side, with Access and Shaw; and on the wireless side, with Telus, Rogers, and so on.
RS: It was competitive before, but it's ramping up and getting more and more competitive all the time. On the wireless side it was ourselves and Rogers primarily. If you looked at prices, prices were different than probably they were in the rest of Canada. But we now have Telus in a major way. They are in communities all through the province and Bell started moving in late in 2011, so they now have a lot more stores around the province as well. I think they put in something close to 40 stores in total.
GOB: Well, with The Source…
RS: More than that, they have their own Bell stores as well, kiosks, and things like that. They've really increased their presence in the market. You have the flanker brands as well with Chatr and Koodo and we understand Wind Mobile is coming in. So it's as competitive a marketplace as anyplace you're going to find in Canada right now.
GOB: No thought to do your own flanker brand on the wireless side?
RS: Well, we talk about it from time to time, but we think we got a very solid brand right now with SaskTel. We’re well known in the province. We're obviously the hometown boys, and we do a lot in the province. People recognize us, so I can't imagine a flanker brand that would get as much name recognition or even value recognition. If you're with SaskTel, our people are right there. They're on the ground. If you're phoning a call centre, you're phoning it in Saskatchewan – our own Saskatchewan people. The benefit of our philanthropy is in Saskatchewan. It's not in other jurisdictions across Canada. So we think people recognize all of that, and they're comfortable being with us. So I don't think you'd see us with a flanker brand.
GOB: What about the business telecom market? What's the competition like in that? I know the cable guys really see that as a potential avenue for growth and wireless is obviously very competitive on the business side as well. Setting aside consumers for a moment, what's it like on the business side?
RS: It's the area that's gotten a lot more competitive than it was in the past. Part of it is the fact that not only the cable companies, but we also have some companies in Saskatchewan that are doing a very limited fibre deployment campaign into major cities. Each of the companies out there also bring something a little different to the business market, and sometimes it's about a business that may have operations that are not just in Saskatchewan but are much more broad, so companies might be able to provide a little different product than we might be able to in those other jurisdictions.
It's just more competitive, more challenging. I also think that as new (telcos) come into the market, companies sometimes like to try them out and see what they can provide, and so I think there are customers that we may see shift over time that I think they'll come back to us.
The other thing that's going to allow us to be a little bit more competitive going forward, is a lot of services are now moving to the cloud, and so as we do more with data centres, more with cloud computing, for instance, we'll be able to service people who aren't in Saskatchewan a lot more effectively than we may have in the past. You'll see us being competitive in a slightly broader market on the business side than just in Saskatchewan.
GOB: Will you have a cloud offering for the people of Saskatchewan?
RS: We've already started down that path… We've got a couple of products that we're working very hard on right now. One is an Oracle product, its Identity Management. We'll be the first in North America, as I understand it, to offer it in the cloud, so again, we've got quite a number of companies, most of them outside of Saskatchewan, which is very interesting, that want the product. And so we see that as being a real good opportunity, and we're working on a number of other things that we're going to bring into the cloud environment as well. We've done some cloud stuff in the past. A lot of which we have provided over wireline was essentially a cloud offering.
The cloud is made out to be something almost brand new. I think cloud is just becoming a more accepted offering because people are getting tired of having their own servers in their own environment. It's not their core competency, and they've gone from having one or two servers to now having a large room or a couple/three closets, and they've just decided, look, that's not my core business; let's give it back to somebody else, and cloud makes it easy to do that. So I don't think it's quite as mystifying maybe as sometimes the market makes it seem.
GOB: It's offsite storage for anything when you boil right down to it.
RS: That's exactly it. So we see that as being a real opportunity, and we've done very well on the data centre side.
GOB: Back to the consumer side, do you have a tough sell ahead of you with the rate increases in some of the high-cost areas that the CRTC has now allowed? I guess in those areas you're probably the only wire there, right?
RS: You just hit it right on. We never like to see increases go into the market and our position that we've taken to the CRTC in the past is that the subsidy fund should remain intact and there should be some subsidy for high-cost serving areas. We think they deserve the same services that you're going to get in any other location, and we believe the CRTC should reward making that happen.
… With that said, the increases are not excessive. It's 5% in three equal installments… To me, it's not a huge issue, but we'd definitely like to see a high-cost serving area subsidy retained.
GOB: With the 4G rollout, the spectrum auction, the fibre push, what's your capex spend going to be like in 2012?
RS: Our capital spending is going to continue to rise, so in 2012 we'll hit $390 million… and we're going to be in the threes for a number of years.
For us it's not just about three large network deployments, but a lot of the backend systems that interface with them. These networks are no longer going to be separate. We're going to collapse our core as well. So when we move to IMS, you're going to see one core, one billing system, one service assurance system over time. And so we're having to redo our backend as well.
GOB: Which is not easy to do. I mean, companies have tripped over that big time.
RS: Absolutely – and you're trying to do it while you're trying to operate. If you could just go build it and spend your time fitting it all together, it would be easy. But the challenge is you've have to run all the existing stuff, plus build the new things, split up your staff resources, and pay for it. We've got three new backend IT deployments that we're working on. One is a new dispatch system, tied to GPS, and it is real time. It'll dispatch our people one job at a time, and make adjustments to make sure that we lessen the amount of time on the road, so there’s more time dealing with customers. It'll improve things in a sense that when we give a window for somebody to be at a customer's home, we can narrow the window and make sure that somebody is going to be there.
We're also working on a new customer relations management system that will lessen the amount of time our call centre people have to stay on the phone. They'll have access right away to all the information.
Right now in our backend systems, they have to have access to 11 different systems to be able to take a client and run them through all the different products. So you can imagine 11 different passwords, 11 different accounts… So we're amalgamating that and we're also working on a new self-serve system. And these things will all have benefits to us: lower our operating cost, make us more efficient, and improve our customer service.
GOB: In Rogers’ last quarter, they said 37% of their wireless revenue is now from data, smart phones are now in the hands of 54% of their wireless base. Do you see similar trends among your customers?
RS: Absolutely… I think our smart phone penetration is now 53% (in total, CDMA + HSPA users) and 70-something on the HSPA network. That’s only increasing and I think you're going to see the percentage on HSPA get much higher. I just can't imagine people buying a regular feature phone anymore. There will always be some who'll stay on CDMA until CDMA is gone, but again, if you're going to move over to HSPA and the rate plans, they all contemplate data and I just can't imagine people would not go that route. I would suggest that over the next year, you might actually see Saskatchewan above the national average. Adoption has been very fast. We haven't been up and operating as long as Rogers (with HSPA), we're just into a year and six months now, so that's a fairly fast adoption rate in that time.
GOB: I don't know when I read this, but I was surprised that you have to give 90% of your net income as a dividend for shareholders.
RS: Yes.
GOB: The taxpayers of Saskatchewan.
RS: The way it actually works is the holding company makes a decision each year on what the dividend will be, and they have a look at your debt equity ratio; they have a look at your capital needs – they consider all those things. So for the past two years, it was set at 90%, so we paid out 90% in 2010; we're paying out 90% in 2011 as well (SaskTel’s 2011 year-end financials are due in April but it’s targeted net income is $161 million).
In 2012 though, it'll change. It'll be different. Our capital needs are quite significant. We're starting to borrow. I think for the first time in about ten years we borrowed last year, and we'll borrow again this year. So that number will come down. It will not be 90% in 2012. It'll be less.
GOB: Now, the provincial government has divested certain things, like SCN, for example, the provincial broadcaster. SaskTel itself has gotten rid of the Hospitality Network and Navigata and a few other things to pare down what it does. Is there any thought at all to taking the last leap and then privatizing the company?
RS: People in the province are always talking about the issue. It's one that creeps to the forefront at various times. I've been in government for 30 years, and I think I've heard it for 20. It's always there. The best way to explain the situation is the government has legislation in place right now. It's on the books. It prohibits the sale of the four major Crowns (SaskTel, SaskPower, SaskEnergy and insurer SGI) so that just answers the question in and of itself. Now will the issue come up in the future? I anticipate that it'll always be a public policy discussion about it. The government is quite direct about it at this point in time. It's not selling the four Crowns.
GOB: Okay. SaskTel has a long history of having fingers in a lot of different pies. I've covered this industry for a long time and I know you were a pioneer in video on demand way back when. You had robotics and VHS tapes and whatever as an early VOD system, which the Hospitality Network grew from. You've had operations around the world, but you've pulled from certain things the last little while. What’s behind that?
RS: The Sask-first policy that was put in place by the government of the day addresses is where you're making your investments. The province is interested in making sure we're making our investments in Saskatchewan for the benefit of Saskatchewan people. Now with that said, SaskTel International is still doing very well. It's had great revenue growth for the past couple years. We've actually returned about $16 million in revenue and it's all service based. Primarily, we're selling software.
So we'll continue to do that. We'll continue doing network builds where there are opportunities. If anything, it's become more profitable and we're doing more of it than we've ever done in the past. I also think from a data centre perspective and a cloud computer perspective, you're going to see us offer more products outside of Saskatchewan. Again, the investments are all being done in the province, but we can offer those products outside the province and service those products outside the province. It makes good sense for us, and it builds on our core competencies.
Anytime you're making foreign investments, there's a difference between operating and running a company and buying into or providing an equity investment in a company… I think as you start getting into the investment game, it’s different, and you can hit some big winners, as SaskTel did in the past, and you can hit some real losers, as SaskTel did in the past. So we're happy with the framework we've got, and it gives us lots of room to grow and develop.
The other difference for us in the last three years than what we've experienced historically is the fact the province is growing… Commercial/industrial growth is going through the roof, so there are a lot of new opportunities opening up for us. A good example is we're working on a fibre development in Northern Saskatchewan that would service the mines, and communities there. It's a major project for us.
GOB: How far north?
RS: It's a place called Points North, but it would only be 300 miles from the Northwest Territories.
GOB: That's a long fibre run.
RS: It'll service the uranium mines that are up there and some of the communities. We've got lots of places like that to deploy capital. Right now our challenge is to make sure we're deploying capital in a way that we're getting the returns to service the debt. So do we have surplus capital to go outside the province? It's pretty much a moot point. We've got our hands full inside the province right now.
GOB: As a small to mid-sized player in our global entertainment, media, telecom, marketplace, how do you look at operating in that sphere? At the same time, when you look at what's happening in Canada with our vertically integrated media and telecom companies, do you feel the need to expand into content so that you've got a bigger stick when it comes to getting content to put on the various screens that your customers are using?
RS: I think the jury's still out on the content question. The vertical integration that has gone on has just been pretty recent; a year-and-a-half, basically. So does that give anybody a true competitive advantage? Part of this is going to depend on the CRTC and whether the Commission enforces the regulations and the guidelines in such a way as to make sure that those that have the content are making sure that it's available in a fair and equitable manner to everybody.
I think it's obvious that Telus believes that the CRTC framework is going to give it a level playing ground, and they're a national player. Also at this point, we believe it'll give us a level playing field as well. We're doing well in getting our hands on content, so if anything, the doors have really opened up a lot wider in the last little while than maybe they were earlier.
I haven't seen anything that would tell me that would be a problem, but again, I think we've got to watch that every year. And again, big question is, what is the CRTC going to look like in the future?
GOB: Any thought of taking that content though to like a Max TV-to-go wireless product?
RS: Absolutely. If you watch carefully, probably later in 2012 you're going to see something like that. We're working on it right now and our intention is to bring it over the top in the future here.
GOB: Interesting. Where do you see SaskTel three years from now?
RS: I'm really positive about the future. I think our bumps were 2011, 2012, 2013, and probably 2014 to a certain extent. And the bumps are the fact that we're having to build three new networks at the same time. We're having to redo our backend systems at the same time, and we're still trying to operate. That's a pretty formidable job, and the staff are doing a fantastic job in making sure that we try to sustain our customer service all at the same time.
Four years out we'll still be working on fibre, but we'll have the majority of it deployed. We'll have a great 4G network for people, a great LTE experience for people as well, and we'll have backend systems that have been rebuilt. By then, we're going to be in very good space, the fibre build is going to future-proof us going out to some of the highest Internet speeds, some of the best products that we deliver to business. I'm very optimistic for what three and four years out looks like.
