Wireless Profits and Price Competition

The incumbent wireless carriers in Canada are doing very well indeed. Not only are they among the most profitable of all Canadian corporations, they rank exceptionally well among all major global carriers.

The Canadian industry leads the world in terms of average revenue per user (ARPU), earning an average of US $54.73 US per user per month. While Canadian carriers posted low per-minute revenue, value-added services such as caller ID and voice mail contributed to the high ARPU.

The average margin in the developed world was 38.3%, with U.K. firms posting the lowest result at 22.6%. The Canadian result was closer to the 42.2% average found among the 29 emerging economies in Europe, Asia and Latin America.

However this success does come with a cost, due to the high price of service.

Canada placed last among developed nations in penetration, at 69%, which was only three percentage points above the average penetration rate in the developing world, at 66%.

It is reasonable to conclude that there is more than mere correlation going on here, that the high margins and ARPU are directly responsible for the high profits of Rogers, Bell and Telus. Ideally, competition is the tool to prick the profit balloon, which by giving consumers more choice will push down prices and increase penetration. That is the idea behind the new spectrum licenses for Wind Mobile, Videotron, Shaw, Mobilicity and Public Mobile.

The market responded to the threat of competition, and therefore profitability, by (at least in part) driving down the share price of Rogers around the time that Wind entered the market and others announced plans to do so this year. This was a bit premature, as more recent price quotes show, with the reports that Wind was not winning large numbers of subscribers from the incumbents. This will indeed take time, not only for the new entrants to build their networks but also to convince the public that their service is reliable enough to make the switch.

There is also the matter of price, since the incumbents will not remain idle. They will have to be careful with how they counter the lower prices offered by incumbents, even if it is done under alternative brands such as Chatr by Rogers Wireless.

The first taste of that came Friday, as Mobilicity chairman John Bitove called reporters to his office and threatened to haul Rogers before the Competition Bureau or launch legal action. He sees the Chatr brand – specifically, talk of its too-close-for-comfort pricing plans – as an “abuse of power” that contravenes a section of the Competition Act dealing with temporary or targeted “fighting” brands. He said Rogers was trying to “destroy” his company.

Under the current federal government I am doubtful that the Competition Bureau or even the CRTC will be enthusiastic about getting involved unless the incumbents' prices become blatantly predatory by being set at levels well below cost. While the government has shown that it is willing to promote competition, even when it means overruling the CRTC and being "flexible" with regard to the Telecommunication Act, they are more relaxed about letting the market operate unfettered. There is also the matter of stock prices and employment: the incumbent carriers are major employers of Canadians and their shares are widely held in mutual funds and pension funds; the government will not want to open themselves to attack on either front.

A possible strategy that the incumbents could take would be to hide predatory prices among service bundles. If they lower a bundle of services (e.g. TV, broadband, wireline telephony and mobile), or offer to add wireless to an existing bundle for, say, $10 more a month, it will difficult to argue that it is the mobile component of the bundle that is getting its price cut rather than one of the other bundle components. However, if they go the route of separate brands for their cut-rate mobile services, such as Chatr, the bundling strategy does not work so well.

I suspect we will have to wait a while longer to find out what pricing strategies the incumbents ultimately settle on. They will not rush to lower prices until they believe they must -- to preserve high profits for as long as they can -- and this will not happen until the new entrants show some success at winning their customers' business. The pricing battle could become very interesting in the latter part of 2010 or early 2011.