OTTAWA – Consumers with less to spend on their telecom bundles combined with the uncertainty created by the North American Free Trade Agreement (NAFTA) renegotiations will slow growth in Canada’s telecommunication industry, says The Conference Board of Canada.
Despite a jump in online services over the past decade, output in the telecommunications industry has actually contracted by 1.5% since 2012, the think tank said a new report. Industry revenues have performed better, but the gains have been due mostly to higher prices and changes to the mix of consumers' telecommunications bundles, which have led to improving margins. However, rising Canadian consumer debt levels will curb household spending, meaning that telecommunication firms will have to keep price increases manageable for their increasingly tapped-out consumers in order to maintain their existing customer base as much as possible.
In addition, with more than 70% of Canadians 18 and older already owning a smartphone in 2015, the pool of available new customers for telecommunications firms to attract to their networks is shrinking. Telecom firms will shift their focus toward growing their market share, which will further increase price competition. In all, these factors should lead to weaker price growth, averaging only 1.3% annually over the next five years, compared with 2.1% between 2012 and 2016.
The industry will also be challenged by the uncertainty created by the renegotiation of NAFTA, which has the potential to impact industry structure and market share. According to the Office of the U.S. Trade Representative, Canada's foreign ownership restrictions make it "one of the most restrictive regimes among developed countries." The agency further argues that as a result of these restrictions, the role of U.S. firms in the Canadian market has been limited to that of resellers that depend on domestic telecommunications firms for access to critical infrastructure and services.
Despite this, the industry's recent financial performance suggests that it will remain healthier than most. Industry pre-tax profits are projected to increase by 3.7% to reach $9.1 billion in 2017. While industry profitability will remain elevated, weak pricing and increased competition will drive the industry's pre-tax margins down from 13.3% in 2017 to closer to 12% in the next five years.
