MTS Allstream’s wireless prospects

Congrats to MTS Allstream for securing $340-million which it will use to secure spectrum and help build a national wireless network.

The commitment on the part of partners Blackstone Equity and the Canada Pension Plan Investment Board is significant to be sure – it has even been hailed by some as the advent of a new era in Canadian wireless communications.

So we should expect MTS Allstream’s financial results in future to soar given the success of Rogers, Telus and Bell in the field of wireless services – right?

Well, not really. In fact, the opportunity for MTS Allstream is smaller than one would think for a number of reasons.

1) MTS Allstream has very little wireless “green field” ahead of it; the Big Three providers that entered the field at various points over the past 25 years already “own” many of the country’s most valuable customers. The situation isn’t going to change by the time MTS Allstream enters the national arena, potentially as early as next year.

Furthermore, the percentage of the Canadian population that owns a cell phone, known as the penetration rate by industry types, will be at or above the 70% mark by in 2010, perhaps earlier, making the addressable market relatively low for any new entrant including MTS Allstream.

2) Increasingly, customers that will be added after this year will be of the price sensitive variety – they are customers that prefer to use their phones occasionally if they use a cell phone at all. They will be harder to please, are likely going to be less loyal and have less disposable income than those that have post-paid service now. That’s a typical scenario carriers in other industrialized countries have encountered once the population passes the 50%+ penetration rate.

There is also nothing to say all Canadians want a cell phone. Canadians are a rapidly aging lot – those older citizens may opt for the familiar and less costly landline than a cell phone.

These factors mean the ceiling for cell phone penetration is lower than 100% – there is even less opportunity than one would expect for MTS Allstream.

3) Furthermore, it will be a costly exercise to steal customers from the wireless incumbents – a lot more so than it would to be to add a net new subscriber to the ranks had the company entered the market earlier.

Even if MTS Allstream is able to secure spectrum at some point after May 27, when the auction begins, it will have to build costly towers and establish a wireless brand out of province too, potentially lengthy and costly exercises. It will probably also have to offer lower prices or offer more innovative (read: expensive) services, maybe both, to attract new customers and differentiate itself. You get the point.

4) MTS Allstream will also compete against Bell, Rogers, Telus and Videotron in Quebec, Shaw, Telus and Rogers in Western Canada, meaning it will be up against more competition than its ever faced for far fewer potential net new customers.

These are hardly the ingredients for financial success – Canada is a relatively small and expensive country to do business in. We do not offer entrepreneurs – God bless them – the economies of scale like those of the United States.

Nonetheless, it is easy to see why MTS Allstream is attracted by the siren call of wireless given the 50%+ margins generated now by some domestic carriers. More to the point, MTS Allstream needs to expand out of province and wireless on the surface appears to be the best way to do it.

But the company’s chances for financial success with its wireless venture are limited. However, a company with invaluable spectrum and national wireless offering looks plenty attractive as a potential takeover target.