How Rogers Wireless Can Win

In my previous post I said that it is possible that Rogers will benefit, not lose, from Wind's entry into the Canadian mobile wireless market. While I did briefly touch on the reason -- roaming charges -- I now think it is an interesting enough point to deserve elaboration. That is the purpose of this article.

As mentioned before, Wind's network will take some time to roll out, whether across our urban areas, the suburbs, transportation corridors or the great expanse of rural areas. They make up for their current low geographic coverage through a roaming agreement with Rogers Wireless, which is only one of the big 3 to share the same radio technology: GSM. The CRTC has mandated that the incumbents must enter into these roaming agreements with the new entrants, and that the roaming charges in those agreements must be reasonable (probably cost plus a small profit, although I have not looked into the actual language). The quoted rate is $0.25/minute, which appears to meet the requirement.

Let's look into a sample scenario using round numbers that I believe are good approximations to many typical cases so we can see how Rogers business changes when subscribers switch to Wind. The format of my analysis should be usable for those interested in doing some digging and using figures more accurate than my approximations.

The market shares of the big 3 are not equal, but let's assume that they each have 1/3 of the total market, and each of their subscribers are equally likely to switch to Wind. Now we can look at what happens when one subscriber from each -- User R (Rogers), User B (Bell) and User T (Telus) -- switches to Wind.

If each subscriber's current bill is $50/month (not including taxes), each carrier has their revenue reduced by that amount. Wind charges less, so their revenue increases by $90 when they charge these subscribers $30/month. We can now back up and exclusively look at the impact on Rogers -- we'll come back to the relative impacts on Bell, Telus and Wind at the conclusion of this analysis.

Rogers has a marginal cost to support each customer, mostly due to billing and customer service (terrible as it is), that goes to personnel, systems, mailings and so forth. If we assume that this cost is $6/month/subscriber, the net revenue loss is $44/month. I'm assuming that the ETF (early termination fee) subscribers pay when they break their contracts to switch to Wind will cover subsidies for the phone they may have provided for free.

Each of the subscribers who switched to Wind will spend a portion of their air time on Rogers' network. For a typical user (and deliberately choosing nice, round numbers!) we can estimate this at 40 minutes/month. This works out to $10 for each of Users R, B and T, or a net revenue to Rogers of $30 (I am making the reasonable approximation that the roaming fees collected by Wind are forwarded to Rogers without any transaction fees). Rogers' net loss has now been reduced from $44 to $14/month.

If the 40 minutes of roaming represent 1/3 of a typical subscriber's total monthly air time, the sum of these three subscribers roaming load is equivalent to one Rogers Wireless subscriber. Therefore the network cost for Rogers is the same as before Wind came on the scene; Rogers lost one subscriber, then gained three 1/3-subscriber traffic loads. The network load is not distributed the same since the roaming is mostly in outlying areas, but rarely in urban cores. Even so, we can call it a wash since the overall long-term equipment impact is similar.

If the actual roaming load is less than what I've described, the roaming revenue declines as does the network load. While the marginal network cost will be lower than the marginal revenue for every unit of air time -- if this isn't clear, think about it some more -- there is some savings since the lower network load allows some network capacity increases to be deferred to a later date. This saves capital expenditure in the near term.

The final tally is a net loss of $14/month/subscriber rather than the $50 charge that appears on their subscriber's monthly statement. This isn't bad! Ok, so while my earlier guess that they might show a net benefit was wrong, they still do very well. This becomes especially apparent when compared to Bell and Telus which each show a net loss of $44/month (using the same set of assumptions). As for Wind, they are carrying a large debt load and are further burdened with a high ratio of capital expenditures to revenue. Of the four carriers it should be clear from even this simple analysis that Rogers Wireless will be the net winner for at least the next year or two.

Perhaps that is why, of the big 3, Rogers raised the least stink when Clements overruled the CRTC to let Globalive turn up the Wind network.

Rogers said it believes competition is good for Canadian consumers.

"We've always thrived in a competitive environment and we're ready to meet the competition head on," spokeswoman Odette Coleman said.

Too bad that a good deal for Rogers Wireless is not so good for us until Wind's geographic coverage is far better than it is now.