The Canadian wireless spectrum auction - the illusion of progress?

IndustryCanada Many a Canadian wireless pundit has predicted the end of the so-called wireless services oligopoly run by Bell, Rogers and Telus.

The turning point is supposed to come tomorrow when Industry Canada auctions off spectrum, which will eventually be turned into wireless service offerings by new entrants as early as next year.

The government department, which will conduct the auction process, reserved 40% of the available spectrum last year so that companies making additional competition a fait accompli.

The additional entrants will help drive down prices to be sure, which means the government will reach its goal at some point in the not-too-distant future. But at what cost to shareholders and citizens?

You see most, if not all, of the new entrants stand little chance of survival over the long term. The cable entrants, such as Videotron and Shaw Communications, will fold wireless into so-called “quadruple play” offerings that consist of wireless TV, internet and landline/VoIP services.

Those companies aren’t going anywhere; it’s easy to see how wireless service can help the providers retain customers in a cost-effective manner even if it is on a regional basis.

But companies, even ones with deeper pockets, such as John Bitove’s DAVE Wireless, have much a weaker business case and thus a shorter life span.

Let’s first consider the offerings these firms are likely to sell. Wireless is indeed a valuable service for Canadians, but the new entrants will soon find themselves outgunned by the Big Three that can sell more plentiful service baskets. We Canadians don’t like to be inconvenienced - dealing with multiple suppliers is just too much hassle, which makes the offerings of the Big Three much more attractive to consumers if they are in any shape or form price competitive.

Secondly, there’s the “penetration rate,” which is industry jargon for the % of Canadians that own a cell phone. At over 60%, it is relatively high when the number of potential new entrants are considered. This isn’t 1980. How many senior citizens and new Canadians with little income have yet to sign up for cell phone service? These are among the types of people that have yet to pick up a cell phone. Not exactly cash cows I dare say.

Is it enough to sustain the businesses of multiple providers? Highly unlikely is the correct answer.

What about the other Canadians that currently use a cell phone? Many of the “pure play” entrants will have to price cut themselves into oblivion to make offerings attractive to current cell phone users over a prolonged period of time. That’s not exactly a winning business case.

This leaves the carcasses of several wireless companies for the likes of Rogers, Bell and Telus to pick from when the inevitable happens and new entrants die a slow and miserable death. (That leaves regional players that perhaps join forces to become a fourth national entrant, assuming the companies ever figure out wireless services is a game of scale. But I digress.)

Fast forward to 2012 or 2013. The wireless services playing field will be littered with the carcasses of the new entrants after financing has all but evaporated and a sustainable business model has yet to be figured out. This will leave Rogers, Bell and Telus to snap up the financially insolvent companies that have managed to accrue sizable customer bases at inflated prices, enriching the owners of the untenable businesses while depriving shareholders of the white knights.

So celebrate the end of what many see as a wireless oligopoly tomorrow while you can Mr. Canadian consumer - it will be for naught over the long term. Eventually, prices will creep up and the number of wireless providers in Canada will again be down to a handful of players. The real winner tomorrow will be the Canadian government which is expected to generate billions in revenue from the sale of the spectrum. That’s competition for ya.

May 27, 2008 | Filed Under News Items and Commentary 

Comments

One Response to “The Canadian wireless spectrum auction - the illusion of progress?”

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