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The future may be friendly, but the numbers aren’t

23 Jul

key-numbersThe debate over wireless prices in Canada is raging hot and heavy, largely because Telus has decided to re-open that established, old can of worms again. Last week, the company engaged in a full-court press to try and convince the public and the media that things are just fine here and that no further government or regulatory intervention is needed, nor does Canada require the likes of U.S. carrier Verizon to come in and shake things up.

In making their arguments, Telus executives – including chief executive Darren Entwistle – served up some curious numbers, including a claim that the company has invested more than $100 billion in Canada since 2000. We’ll look at some of that data below, but first, there are really only two figures that matter in this whole debate. The image above shows where Canada rated in those two measures in the first quarter of 2013, according to the newest edition of the Bank of America Merrill Lynch Global Wireless Matrix.

Why do those two numbers matter? The first – average revenue per user (ARPU) – is the size of the typical customer’s bill at the end of the month. There’s some debate over how and why it’s so high, but obviously, it’s the highest in the world.

The second number is how much profit – or earnings before interest, taxes, depreciation and amortization (EBITDA) – Canadian carriers are pulling in after paying their expenses. EBITDA doesn’t account for how much a wireless carrier has spent on building its network, but it does factor in all the other costs associated with selling services over it.

The full charts on both these measures are at the bottom of this post, but as is clear, Canadian carriers are almost unmatched in how much profit they’re extracting from their businesses (only Italian and Portuguese carriers are getting more).

In his PR offensive, Entwistle has been saying that Canadian carriers are investing more in their networks than just about anyone else. That’s somewhat true. According to the just-released Organization for Economic Co-operation and Development’s 2013 Communications Outlook, Canada ranks well – fourth overall – in telecommunications investment per capita:

investmentHowever, Entwistle is wildly overblowing just how much Telus itself is actually spending. He’s quoted in a post last week on the company’s public policy blog as saying:

When you consider that Canada’s wireless subscribers, spread out over our vast and challenging geography, pay about the same prices as people in much more densely populated countries and yet have access to more national LTE networks than people in any other country – it really is remarkable. TELUS alone has invested $100 billion in Canada since 2000 to make that a reality.

How he arrives at that $100 billion figure is a mystery. According to a slide from a Telus presentation at the 2012 Telecom Summit, the company’s total capital expenditure – the money it spends on building and maintaining networks – is a fraction of that:

telus-capexSince 2005, Telus has spent about $15 billion on capex, or less than $2 billion a year, with roughly a third of that going to wireless. Either the company spent $85 billion between 2000 and 2005 (extremely unlikely), or Entwistle is including the cost of PR, government lobbying and advertising. Whether or not that should count as “investment” is up the individual observer to decide.

What the wireless companies aren’t talking about is why they’re investing. The current spending by Bell and Telus on fourth-generation Long-Term Evolution networks is a direct response to their bum investment decisions years ago on CMDA wireless technology, which ended up losing out to GSM, or the standard that Rogers went with.

They’re now catching up and leap-frogging to the next technology, which is of course logical. Carriers in other countries, meanwhile, now find themselves behind because they previously invested heavily (and correctly) in GSM. They too will inevitably soon crank up investment to catch up, perhaps leap-frogging to 5G, at which point Canadian carriers will look like laggards once again. It’s the circle of life, wireless style. Unlike what Entwistle wants people to believe, there’s nothing special about it.

The question then, is why is Telus in particular putting up such a fight? In editorial board meetings with several newspapers last week, the company’s CEO essentially pleaded with the government to “level the playing field” and not give new wireless entrants – aka Verizon – any special benefits in the upcoming spectrum auction. Bell and Rogers seem to have just as much to lose, but so far they’re being pretty quiet about the Verizon spectre.

There’s a good reason why Entwistle is specifically agitated – he knows the U.S. carrier better than most. The company, after all, used to own 20 per cent of his company. Odds are good that the Telus CEO still has Verizon executives on speed dial, and that he’s made calls to see how serious they are about Canada. If he’s making a very vocal show of opposing the whole thing and effectively begging for the government’s mercy, that’s a strong sign that Verizon is indeed very serious about coming north. One insider who is close to the negotiations between the carrier and its takeover targets – Wind Mobile and Mobilicity – told me the other day the likelihood of its entry is about 70 per cent.

If Verizon does indeed come to Canada and takes part in the January spectrum auction, it will have a big advantage over Bell, Rogers and Telus that will in fact re-align the industry. As per the rules, new entrants – which Verizon qualifies as – will be allowed to bid on two of four blocks of spectrum nation-wide. With no real competition for these blocks, the U.S. company will scoop them up, leaving the remaining two to be squabbled over by the incumbents. The problem is, there’s three of them.

The nature of Bell and Telus’s network-sharing agreement, the insider says, is that they must both deliver spectrum to it. Both companies therefore have strong incentives to acquire those two remaining blocks; if one or the other comes up short, the network-sharing agreement will be thrown out of whack, meaning one company could either get more control over the network or the other would have to regularly start paying big bucks to make up for its shortfall. And what of Rogers? The company isn’t exactly going to sit back and allow itself to be shut out.

So yes indeed, when Entwistle speaks of a “bloodbath,” he’s right – there’s going to be fierce competition in the auction between the Big Three, which means they’re going to have to spend a lot of money.

That ultimately brings us back to the big two numbers above. Verizon, if it does indeed enter Canada, is going to force both of them down. As the challenger, the company will offer better prices and deals, which is good for consumers. The Big Three, meanwhile, are going to be forced to spend more and to rake in less, which is bad for them.

One last thing – Entwistle, in the blog post, said that report after report finds that Canadian wireless pricing “is extremely competitive.” Unfortunately, that’s not even remotely true. Over the weekend, the Canadian Internet Policy and Public Interest Clinic looked at the effects on pricing of the new three-year contract ban in comparison with other countries and found that in all cases, consumers here are getting hosed:

Perhaps somewhat shockingly, U.K. customers pay less money to O2 ($1,946.04 CAD) for three years of service than Canadians would have to pay Bell or Rogers for the same phone and the same service for two years of service ($2,321.28 & $2,272.99, respectively), and pay less up front for the associated handset that comes with the plan.

Moreover, here’s where Canada ranks in pricing across a number of service examples in the OECD’s Communications Outlook. I’ve thrown in wired broadband, just for kicks:

price-comparisonIt’s amazing that Canada rates near the bottom of every measure, isn’t it? Telus is fond of saying that “the future is friendly.” If that’s true, I’d hate to get on the future’s bad side.

(Here are those full ARPU and EBITDA numbers, from the Merrill Lynch Wireless Matrix, for anyone’s who interested:)

arpu-profit

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12 Comments

Posted by on July 23, 2013 in oecd, telecommunications, telus

 

12 responses to “The future may be friendly, but the numbers aren’t

  1. investor perspective

    July 23, 2013 at 1:11 am

    We can only hope it will be a bloodbath. The government policy of subsidizing spectrum purchases in the last auction was looking like a disaster. Although the government was just trying to buy some votes it was backfiring badly. Consumers were never going to notice that there were hundreds of millions of dollars left on the table at the auction as they rigged it for new entrants. But we were supposed to notice our cell phone bills going down. Unfortunately the plan didn’t work so well and not only are the new entrants failing but the big 3 are trying to buy up that subsidized spectrum.

    Who would have thought the entry of a US giant would be the saviour of the government’s flawed policy. Not only could we end up with legitimate 4th player to pick up the broken pieces of the existing new entrants, but with well financed bidder in the upcoming auction we could get payback for the taxpayer. Instead of leaving the big three to wink and nudge each other while they each get a prime block, now one could get shut out. How’s that for bidding tension? Taxpayers may be made whole on the auction proceeds and have some competition to boot. Verizon may not be the low cost competitor some want to see but if they are going to make a go of it they will want a healthy chunk of share over time. I don’t see how they get there without injecting a healthy dose of competition.

     
  2. Paul Barter (@barterpaul)

    July 23, 2013 at 9:40 am

    Nice work Peter!

     
  3. Ed Sadowski

    July 23, 2013 at 9:53 am

    Telus is very accomplished in portraying its niggardly service as exemplary. It recently had the audacity to trumpet it will be extending FTTH to “*hundreds* [emphasis mine] of new homes and businesses” in BC over the next three years.

    http://about.telus.com/community/english/news_centre/news_releases/blog/2013/05/28/telus-investing-1-billion-in-all-corners-of-bc-this-year

     
  4. Vishal Malik

    July 23, 2013 at 10:57 am

    Hi Peter:

    I want to make three points that you seem to have missed:

    1. You say that Telus mainly invested in 4G because of their bad investment in CDMA. While that might be true for HSPA+, how can we apply the same argument for the Big 3′s investment in LTE?

    2. You haven’t fully addressed Telus’s point that they invest more and they have quality networks to show for it. Quality is not just about 4G. It is also about things like dropped calls, rural coverage etc. For example, Telus claims, on their blog, that the population density covered by their network is 12 subs/sq-km as opposed to 37 in the US and 312 in the UK: http://blog.telus.com/public-policy/scratch-the-surface-and-the-shine-comes-off-critics-mythology/

    3. You say that Bell and Telus are, so far, quiet about the Verizon spectre. However, Bell was the first one to raise the issue of unfair advantage to Verizon a few weeks ago: http://www.vancouversun.com/technology/Ottawa+unveils+guidelines+wireless+spectrum+transfer+deals/8592526/story.html

    In fact, Bell has been speaking against large foreign competitors being able to bid for more spectrum than Canadian incumbents even before there was any news of Verizon’s interest in Canada. For example, during a consultation for the auction framework for 700 MHz spectrum in spring 2012, Bell started their submission by speaking about this very issue, even though the government had already announced the spectrum-cap policy and this issue was out-of-scope of the the consultation.

    ( Bell’s submission is here: http://www.ic.gc.ca/eic/site/smt-gst.nsf/vwapj/DGSO-002-12-comments-bell-submission.pdf/$FILE/DGSO-002-12-comments-bell-submission.pdf )

    Telus was quiet until last week. Rogers, so far, has been quiet.

     
    • Peter Nowak

      July 23, 2013 at 11:56 am

      Good questions Vishal.

      1. From what I’ve been told over the years, upgrading from HSPA/HSPA+ to LTE was pretty simple and inexpensive, so the real jump was from CDMA to HSPA+. You’ll remember that U.S. carriers labelled their HSPA networks as 4G, which was technically incorrect until the International Telecommunications Union redefined the term in response. Once that happened, Canadian carriers also began referring to their previous 3.5G networks as 4G.

      2. I’m not sure quality, coverage, etc. are germane to the points I’ve addressed above. That’s perhaps something to be dealt with in a separate post, because there are many aspects to it. For one, Canadian carriers generally have a lot more spectrum to play with than some carriers in other countries do, which works well with our lower population density. On the other hand, Canadian carriers have also been found to have fewer cell towers. How this all fits together invites further examination.

      3. Bell may have filed submissions to consultations and dropped the occasional quote here and there, but that’s very different than Telus’s aggressive public relations campaign. So far, Telus is being much more vocal than Bell or Rogers on this issue. I’ve found that to be pretty standard over the years. Why? Your guess is as good as mine.

       
      • Vishal Malik

        July 23, 2013 at 1:52 pm

        You’re right that this isn’t the first time Telus has aggressively opposed Govt’s policies favourable to new entrants. Remember they were the ones to ask Industry Canada and CRTC to review Globalive’s foreign ownership.

        However, I’m confused by their new position on 700 MHz spectrum-cap policy. When the Govt first announced this policy last year, they issued a press release saying, “TELUS believes this is a thoughtful and balanced decision that meets the Government’s objectives of promoting consumer choice, supporting sustainable competition through investment in technology and further expanding broadband services in rural markets.” ( http://www.newswire.ca/en/story/937853/telus-comments-on-industry-canada-s-spectrum-auction-and-foreign-ownership-decisions ). Now that Verizon is in the picture, it’s unfair?

        In the Globe and Mail article, they claim that the spectrum-cap policy was intended for start-up companies. But I always thought the policy was to encourage “new entrants”, not “start-ups”. A start-up company will, likely, not be able to win two key blocks of 700 MHz anyway.

         
  5. Chris S

    July 23, 2013 at 12:00 pm

    How much of the “$85 billion investment” would be accounted for if the subsidy of phones was counted as an “investment”?

    Telus might be taking the view that handing over a $500 phone that can take advantage of LTE networks is part of the cost of getting the LTE going … to “make that a reality”.

    That won’t cover all of it, though – 7,000,000 subscribers times $500 each is still only $3.5 billion – although a handset every two years for twelve years might make that over $20 billion.

    The more I think about it, the harder it is to work out. According to the annual statement, the entirety of Telus expects to have revenue of $11.6 billion for 2013, with wireless expecting a revenue of $6.3 billion. By that measure, an investment of $100 billion in LTE would appear to be 12 times the annual revenue!

     
  6. Chris S

    July 23, 2013 at 12:02 pm

    Interesting point on the CDMA vs HSPA changes — could writing off a few tens of billions of CDMA gear count as “investment”?

     
  7. Jean-François Mezei

    July 23, 2013 at 1:38 pm

    Since Bell and Telus operate a shared network, without knowing the share of capital contributions by both it becomes hard to know what the real investment in infrastructure is.

     
    • Peter Nowak

      July 23, 2013 at 3:24 pm

      Not really. Both companies are required to disclose such expenditures to shareholders.

       
  8. Jon

    July 23, 2013 at 1:55 pm

    Everytime the government tries to stick it’s nose in here, adding new regulations to “protect” the consumers it backfires. We need less government intervention and let the market dictate these prices and services.

     
 
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