The Future May Be Friendly, But The Numbers Aren’t

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The 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:

However, 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:

Since 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:

It’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:)