WHILE THE CANADIAN WIRELESS world and the politicians who oversee it spent the dog days of summer 2013 barking at each other over policies they said were either wrecking the business or boosting competition (depending on your point of view) one player, Halifax-based Eastlink, remained largely silent.
While Eastlink is a big deal in Nova Scotia and Prince Edward Island especially, and does daily battle down East with Bell Aliant, CEO, Lee Bragg told Cartt.ca in a recent interview that adding his own voice to that cacophony would have accomplished little. And besides, even though he can’t side with government policy that would have created an easy way for a foreign wireless giant to purchase valuable Canadian wireless spectrum ahead of his own company, neither could he stomach the public relations campaign waged by Rogers, Bell and Telus through July, August and September.
“I was in two places on this whole Verizon issue,” he told Cartt.ca in an interview in his Halifax office in the days prior to the September 17th deadline to submit deposits for the January 700 MHz spectrum auction. “One, the incumbents overplayed their hand with this big public campaign. For Bell, Rogers and Telus to try and get the public on side with why there shouldn’t be more competition, which was effectively what they were trying to argue, I said ‘well, nobody likes them anyway, so they’re not going to get any credibility in the public market with a campaign like that.’
“What you do is force the government’s hand to automatically go against you. There’s no way (the politicians) could be perceived as supporting the big guys when their mandate is to try to encourage competition. The Big Three should have had a quieter campaign, a behind-the-scenes lobby to try to explain how they really felt about Verizon,” Bragg explained. “Whether that would have changed it or not, I don’t know, but I do know to come out with full-page ads in every newspaper, talking about how fantastic they are… the government’s just going to say: ‘I can’t, just on principle, agree with that’.”
Then again, Bragg (right) is sympathetic to some of the arguments posited by Bell, Telus and Rogers. “The original policies were structured to encourage new Canadian competition and Canadian entrants, whether it was tower sharing, mandated roaming, even the (spectrum) set-aside in the (2008 AWS) auction. Then (the federal government) changed the rules for foreign ownership so if you had less than 10% of the market, you could attract a greater percentage of foreign investment – (but) again, all designed to prop up and support the Canadian companies,” said Bragg.
“So it did seem to be a little odd we would allow Verizon, who’s five or six times bigger than all of us put together, to come in and… own two blocks of prime 700 spectrum. That didn’t make sense to me. But I think part of it was the pre-existing policies didn’t really work to create tremendous viable competition. I think it has here – and Quebecor has done a great job. There are pockets.”
Does EastLink want some of that 700 MHz spectrum? Definitely. It is one of the bidders which declared itself on the September 17th deadline to enter. However, explained Bragg, the structure of the auction means it will likely stay at home while bidding. “I’d definitely like some 700 MHz spectrum,” he said.
“Where we targeted the last auction was to try to get spectrum that fit our cable footprint,” he explained. While Eastlink is the incumbent cableco across Nova Scotia and PEI, it also has hundreds of other systems spread from Newfoundland to British Columbia and it was able to purchase AWS spectrum in some smaller pockets, such as in Northern Ontario, where it is the cable provider in Sudbury, Timmins and some smaller communities.
“A challenge I have with the new auction structure is they made the spectrum blocks geographically bigger – so we can’t get anything in Alberta now, for example, because all of Alberta’s one block,” explained Bragg, whose company owns many systems in the province, its largest being Grande Prairie. In the 2008 AWS auction, however, “you could pinpoint areas like Cape Breton… and if you had the cable system in Cape Breton as a standalone business, you could justify that. We got hurt the last time in Delta (B.C.) where we don’t have any spectrum because it included Vancouver. The requirement to build when you get spectrum, is you have to cover 50% of the population and we didn’t have any great desire to build out in Vancouver because we can’t offer anything else other than cellular. So… we don’t have any spectrum out there.
“We have northern Ontario and to do 50% of the population, we need to do Timmins, North Bay, Sudbury and some other communities, of which we have (cable in) a lot of those. Cogeco has North Bay, but we might be able to do some sort of bundle deal with them. They’d be up for that, I’m sure.”
Eastlink also owns spectrum in Newfoundland & Labrador, where, save for a few independents, it is the cable provider in almost every town except Rogers-owned St. John’s and Corner Brook. “That’s a lot of geography and not very many customers, so we’ve got to get our head around building that. Then, New Brunswick’s a tough one because it’s right next door, but we don’t have any other products. That’s where 700 MHz helps because you only have to build half the towers than you do with AWS. So if you think you’re only going to get 10 or 20% of the market, it’s much better to only spend half the capital, and you might be able to make it work.”
THINKING BIGGER?
Would Eastlink ever go national by perhaps making a play for Wind? “I think Wind has a challenge, in that they’re just one product,” responded Bragg. “We’re so used to bundling and we know how that works. I don’t know how they could make (a single product) work. Lots of people said you could do a Leap or Metro PCS, which I think Wind could work in Toronto, where you say ‘well, I’m going to get 10% of the marketplace.’ But, there are a lot of Canadian markets that you need a hell of a lot more than 10% of the market, like Prince Albert, Saskatchewan (pop. ~35,000). We’d starve to death trying to get 10% of the market there. You need 50% of that market.
“I need half the market. I want half the market. I already have half on one side of the business, so I can’t feed my kids on getting 10% of the market in Stellarton (N.S., pop ~4,500). I need a big chunk of it. But that’s the rural nature of the systems we cover. That’s why the bundled strategy makes so much sense for us. It all comes back to why, I think, the government should be focusing more on those regional carriers, like SaskTel, Manitoba Tel, Shaw, us, and Videotron.
“We’re motivated to build out into rural Canada because that’s where our customers are. Wind, Verizon, or anybody else won’t bother because they’ll just build the cities, and they don’t care about the rural areas. They’ll never build Grand Prairie or Cold Lake, or Forestburg, Alberta and all these little towns that we have cable customers in. We’re motivated to service our own customers.”
WHAT ABOUT THE REGS? (ESPECIALLY ROAMING AND TOWERS)
“I think we’ve made a good step by the CRTC now taking some jurisdiction over roaming rates, for example. But it would be better if the CRTC looked at tower sharing, too. It’s taken them time, but the CRTC has a pretty good track record on introducing competition in the fixed line telephone and mandated co-locates, renting twisted pair, access to telephone poles down the streets, all that stuff,” said Bragg. “They do good, cost-based methodology for allowing us access to third-party infrastructure and they’re not punitive rates.”
Industry Canada, on the other hand, hasn’t done that type of analysis while saying tower sharing is a must. They just left the incumbents and their new entrant competitors to their own devices to try and come up with a shared structure market and it has not worked (see photo). “When Industry Canada came up with the roaming and tower sharing, they mandated the incumbents to share, but at market rates. Well, there wasn’t a market. You had one or two guys who could just tell you ‘here’s the deal we’re putting on the table, and that’s the market because this is what we say it is. There was no teeth to it. We were paying crazy amounts for tower sharing and crazy amounts for roaming, and they just said ‘well, if you don’t like it, don’t do it’.
“It doesn’t make sense that Bell charges $60,000 a year to access to a tower that costs $150,000 to build, and there’s space for three or four carriers up there. My favorite example just across the highway from the (Stanfield) airport… there’s a Bell tower, there’s a Rogers tower and an Eastlink tower, all within about 100 feet of each other, all under-utilized, all with about a third of the electronics on it, but only because everybody was just trying to charge too much. It’s poor public policy. Why do we need all these towers all over the place? The right spot for a tower tends to be the right spot for everybody – near the airport, on a hill, on a rooftop – so you’ve got all this stuff around that you don’t necessarily need, but only because nobody had the balls to really put some teeth into the regulation to say what’s a reasonable rate of return on a tower? If it cost you $150,000 or $200,000 to build, maybe it’s 15%. There’s room for three people on there. You do the math, and it should be $12,000 a year or something like that, rather than $60,000.”
WHAT HAS THE WIRELESS CODE WROUGHT THUS FAR?
It’s early days (since the CRTC’s new Code doesn’t officially start to come into force until December 2nd) but Eastlink and its customers already are feeling it, and it’s not positive, says the company’s CEO. Canadians have come to expect “free” phones when they want to buy or upgrade and the offer has traditionally been $0 down and pay it off over the life of the contract which has been up to three years. “We don’t have contracts, so it’s not so much contract-oriented as payback on the phones for us, and now if we discount a phone, we’re forced to try to get a payback in two years. It screws it all up for somebody like us, who was trying to do the right thing with consumers. But now, we’re forced to charge more for the phone than we really need to. It’s kind of stupid they did that rule,” he said.
HOW HAS EASTLINK FARED IN ITS FIRST NINE MONTHS AS A WIRELESS COMPANY?
Of the AWS set aside spectrum winners from 2008, Eastlink was the last one to come to market (not counting Shaw, which abandoned cellular technology for Wi-Fi). It’s not that the company was reluctant or had second thoughts about it, says Bragg. The cautious planning and launch was deliberate. “We were coming in as the fourth guy, so whether it was a year after the auction or 10 years after the auction, it didn’t really matter when we started,” he said. “What mattered was that we didn’t spend 10 or 20% more on the capital than we needed to. We weren’t in the wireless business, so we really had to build our knowledge and hire the right people, so we just took our time at it. Once we decided, once we picked everything (Ericsson is its network partner), we went really fast and built the network like crazy.”
The company launched wireless on Valentines Day 2013 and kept the market waves to a minimum at the beginning. “We actually started quite slowly,” said Bragg. “We didn’t pour a ton of money into advertising and marketing early on. We came up with the programs and bundle discounts and things like that, but we were slow to build the awareness.”
Eastlink wanted to organically build the company’s real-life experience so “rather than just give (Eastlink employees) phones when we started, we asked them to go to a retail store, get sold on the product and test it that way,” explained the CEO. “We also wanted to test our pricing and our packages and the way we structured things. We tried to simplify it, but it was a little different than what the traditional guys had in the marketplace.
“I didn’t want to spend $5 million on a big ad campaign and push it out there, and then three months later, say ‘oh, that doesn’t quite meet the customer’s expectations,’ or have the competitors completely react and me having to change it all over again,” he continued.
So far, more than 80% of Eastlink’s wireless customers are bundled or had been existing Eastlink cable/home phone/broadband customer who chose to add discounted wireless services, too. As well, “because of the power of the bundle, some customers want the wireless discount so bad they’re moving all products away from Aliant to get it, which is encouraging. Not thousands, but enough that we can see how deeply discounting cellular in a bundle really can drive it – and part of that is the uniqueness of cellular, too, where there’s lots of cellular revenue in a house because there’s more than one person in most households.”
Traditionally, for cable companies, it didn’t matter too much how many people lived in a subscribing home. With “local telephone, long distance, cable, high-speed Internet, really, you have a relationship with the side of the house,” said Bragg. “It’s with the address. It doesn’t matter how many people live there, it’s the same product and the same revenue. But it does matter how many people live there for cellular because you get a chance to sell two, three, four wireless plans.”
Right now, Bragg says Eastlink Wireless is gaining most of its subscribers at the expense of Rogers, which is the biggest stand alone cellco in its regions, with 30% of the market when Eastlink launched in February (Bell has 60% and Telus 10).
UNWINDING THE CABLE PACKAGING (WELL, AS MUCH AS ALLOWED)
Earlier this year, Eastlink launched a limited form of a la carte channel selection, where it is offering customers the chance to select individual channels from a list of 70. However, none of the channels on the “Personal Picks” could be said to be the most popular specialty channels. But even it this limited form, where individual channels are $2.95/month, broadcasters remain reluctant to offer this level of choice. “We’re getting a lot of pushback from content providers on our pick-a-pack stuff,” said Bragg.
“That’s restricted by our contracts, so we have to wait until we re-negotiate freedom to be able to sell standalone and unbundled with the others. It’s consumer friendly – the right way to go, and it’ll demonstrate the content that’s worthy and that people want to watch,” he added. “We’re trying to react to our customers by trying to create more flexibility. I tell the customers we are still handcuffed, to a certain standpoint, with contracts with the content providers who really don’t want us to sell on a standalone basis, so we’re working on that… The challenge is customers have to understand too, that there are some economic advantages to buying their content in a package.”
With the new CRTC review of our television policies on the near horizon, Bragg, among many others, believe some hard decisions are fast approaching for the industry and the Regulator. “I think our structure has allowed weaker channels to survive because the guys who own them say ‘well, you’ve got to carry them’ – whether it was a must-carry rule, or that they’ll take away a good channel if you don’t put this other channel in with that package. We’re as guilty as anybody as allowing it to happen, but with consolidation of the content owners, that gets worse,” he explains.
“Whether there’s one customer watching HBO Canada or a gazillion customers, it costs the same to buy the content, create it, put it on the air, run the network, so I get it why having fewer customers is going to cost more. But I don’t think that’s all bad. I think content should be priced reasonably enough so then we’re all motivated to try to package it together to get more value. The challenge we have now is we’re trying to protect weak content that nobody wants and (broadcasters) are scared to learn that. They don’t want to know that nobody likes my content.”
TV EVERYWHERE AND EASTLINK TO GO
The multiplicity of rights regimes is a tough thing for a company the size of Eastlink to navigate and even though many will say watching television you’ve already subscribed to on a tablet or a smartphone should be treated the same way as watching on a TV set in a rec room or garage, the content owners want to charge distributors more for delivering that type of viewing.
“That’s where an old economic paradigm needs to shift with the technology. You say well, there’s mobile rights and there’s online rights. So if I’m webcasting TSN, there’s a different set of rights than on a mobile device, which is then different than traditional linear broadcast, and then the on-demand rights are different again,” said Bragg. “The lines between all those things are blurring, so if I’ve got a tablet, is that online, or is that mobile? Then, if I have a tablet that’s connected to wireless and I save it on a hard drive, is that on demand? The technology is changing, and these economic structures can’t keep up with it.
“And that’s what drives the consumer crazy. I have to charge more because you’re watching it on something different.”
FOREIGN INVESTMENT
If we take the approximately $9,000 per subscriber for which Rogers paid to buy Mountain Cable in Hamilton, Eastlink and its 475,000 or so customers would be worth $4.2 billion. However, with our foreign investment restrictions still in place for broadcasting, the potential bidders for such a company can only be found in Canada. While Bragg says his family has no plans to sell the business, “I think we’re starting to see some of the foreign ownership rules crack a little bit – which I think is healthy. I mean who cares who owns it, really? What does that accomplish? You can regulate anything. You can regulate Canadian content, regulate where a head office has to be, how many jobs, you can regulate rates, you can regulate lots of stuff. Regulate the operations because that’s meaningful. Regulating who owns it doesn’t matter a hill of beans and what (the FO restrictions ) have allowed is it’s shrunk the options for somebody, like an Astral, to sell to,” he said.
“I challenge the Commission. I say is your goal just to have Bell and Rogers and Shaw be the only companies in Canada in the media world? Because that’s really what they’re doing by continuing to constrict the potential buyers for anything. Then, even though we don’t want to sell, nobody wants to be your banker if they know you can’t sell to anybody, if there’s no exit plan. It forces you out of the business.”
BERMUDA AND GROWTH BEYOND CANADA?
The remaining independent cable and telco companies left in Canada would not be very large purchases or add much growth for the larger players, so Bragg (as well as Cogeco) are looking outside Canada for additional growth beyond wireless and other services such as security.
Bermuda is an international insurance and re-insurance hub and the company Eastlink purchased in 2011 is the long distance provider only, because until recently, local, long distance, video and some other services could not all be owned there by the same companies. While the Bermudan government is altering its regulations on that, says Bragg, Eastlink has used what it is learning there to build up is building other capabilities which the company may bring north. “We have a huge data center down there, which is really a neat business.” Many of the insurance companies route their customer transactions through Bermuda and host their company data on the island. “But it’s an area which shows how I can get more value out of the existing customer base I have (in Canada). I thought… we have a big commercial client group, and that’s not an area of the business that we’re in, in Canada.” Bell, Telus, Rogers and Cogeco are all already in that business and see it as a growth driver.
“If we want to grow geographically, it’s going to be outside of Canada most likely, so we needed to learn how to do that, and Bermuda is only a two-hour flight away, which is nice. It’s politically stable. It’s economically stable. So it was a safe place to do my experiment of learning how to run a business outside of Canada.”
