IF YOU WANT AN EARLY look at what the communications infrastructure in Canada is going to look like, it might be worth studying Saskatchewan.
The incumbent telco, SaskTel, has embarked upon an ambitious, aggressive, costly push to modernize its network, driving fibre deep into its communities, taking dead aim at the two large cable companies in the province with its MAX high speed Internet and digital television service.
The reason why this might offer a glimpse into the future is that this is a province where the “normal” economic guidelines the rest of the communications companies in Canada are bound by don’t apply – and the incumbent telco is taking advantage of that to try and sprint ahead of the rest of the world. SaskTel is a 97-year-old provincial telco still owned by the government. The province has a minister responsible for telecom and it’s the largest jurisdiction left in the country where the taxpayers own the telephone company. (The rest are all municipally-owned).
Despite what the company’s leaders might say, as a Crown corporation, SaskTel is covered by a different set of rules. It is freer to spend, freer to take risks – and a dead-solid lock to maintain its credit rating and its ability to borrow money cheaply, should it need any extra. There’s nothing more stable to fall back on than government from a debt point of view.
SaskTel owns 99.6% of the wireline market share in the province and over 50% of the high speed Internet customers, SaskTel president Robert Watson told a Scotia Capital conference in Toronto last week. Its wireless network covers 95% of the population of the province and SaskTel Mobility has 80% market share. And, “we plan on hanging on to every customer we have,” he said.
In September of 2002, the company launched MAX, its digital television product, which has since built up a customer base of over 42,000, said Watson. Its average revenue per unit (ARPU) among Max customers – generally high speed Internet plus TV, although some have wireless bundled in – is $63 a month.
In 2005 MAX Front Row, its video on demand service, was added to the mix and unlike other small TV providers, SaskTel has been rather aggressive in signing VOD deals with studios, counting FOX, Sony, Paramount, Lion’s Gate, Warner Bros., and Alliance Atlantis as content providers. Front Row offers moves for $3.95 each (which is more than a dollar cheaper than what Shaw Cable sells VOD movies for in Saskatoon).
Watson said SaskTel will spend $300 million over the next two years to dramatically boost its network’s capabilities. Right now, MAX can deliver 8 Mbps to each customer in the 10 largest communities in the province. That means MAX customers can’t get HD and can only get digital television service to two TVs.
However, by the end of 2006, the company “will be able to get 50 megabits delivered to every household in the 10 major communities,” said Watson. “It will be one of the best networks in the world.” Loop lengths will be reduced from 2.5 kms to less than 900 metres. New subdivisions will have fibre to the curb.
MAX will then serve up to four televisions in the home, enable HD and provide a 5 Mbps Internet service, added Watson.
(Doing some quick math using SaskTel’s numbers, for Bell to do something similar across its far more populous territories, the costs would top of $5 billion. Of course, Bell is spending on a terrestrial IPTV launch in 2006. But not that much. And certainly can’t do it in a year.)
Inside of a decade, predicted Watson, 100 Mbps will be delivered to 85% of the homes in Saskatchewan by SaskTel.
But back to how the economics are different. SaskTel, as a crown corporation, doesn’t face the markets and doesn’t have shareholders in the truest sense of the word the way, say, Telus, Bell, Rogers and Shaw does. And those all have to raise money in the open market.
Watson likened the company to an income trust at the conference, which pays out to its unit holders. To get this network upgraded this way, “the shareholder has agreed to reduce the dividend paid to them,” he said. The thing is, the decision is made by one man, Maynard Sonntag, the Minister Responsible for Telecommunications, and when you’re promising 50 Megabits to most of the voters inside a year, like I said, the rules are different.
Somehow, I can’t imagine the unitholders of other telecom income trusts like Amtelecom, or Bell Nordiq accepting a reduced distribution so that the company could install a gold-plated network so quickly.
But my point is that since SaskTel is freer, it may be the place where we really see what a fully-converged telco (with a few regulatory restraints) looks like along side cable competitors.
Will the telco successful? While 42,000 TV customers over three years is pretty good, Watson acknowledged some hiccups.
MAX is “the most successful product we’ve ever launched,” he said. “But it’s also an inferior product to cable because of having only two TVs and no high definition.” Last year at this time, Watson added, MAX was losing more customers than it was taking on thanks to the competitive response by Access Communications, the cable co-op serving Regina and other areas in the south of the province.
Now though, SaskTel is adding 500 to 700 new MAX customers a month, he said.
Access won’t be left behind though. It has plans to launch voice over IP in 2006 to compete with SaskTel. There are a few smaller cable operators in the province which will also respond aggressively. Shaw, the Saskatoon, Prince Albert and Swift Current cable operator, has not said when it might launch VOIP in its territories and has been pretty quiet in the province.
But with the way SaskTel is moving, responding to the type competition this ILEC is building in the Land of the Living Skies, will be difficult.
