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Canadian Wireless Summary Q3 2012

Canadian Wireless Summary Q3 2012

We were waiting in the hope that Mobilicity and Public Mobile might release some numbers, but no joy on that front, so we will assume that they did not do as well as WIND.

We think there are three stories that are playing out in the Canadian wireless market:

  1. Rogers no longer has a network advantage, causing higher levels of churn and resulting in them no longer wining their fair share of Canada’s highest value customers;
  2. The Bell-TELUS HSPA/LTE shared network has given them a competitive advantage but also made it difficult for them to differentiate from one another;
  3. WIND had made great progress in terms of getting customers, but they cannot compete with the incumbents on a network, handset line-up, distribution or experience basis.  A bificated market has developed where the flanker brands and new entrants use discounting to fight for the relatively unattractive low end postpaid and prepaid market, while the incumbents have higher prices, higher revenue and higher margins.

We will do this in three parts over the next few days, starting with Rogers in this posting.

How does Rogers compete without a network advantage?

Like Verizon in the USA, Rogers used to compete by having the best network and advertising around this fact.  It worked.  But Rogers had the only GSM network, which also made them the only choice for every business person or consumer who wanted to travel outside North America.  When Bell and TELUS teamed up to build a ‘shared’ HSPA network, they built a better network than Rogers had.  It was better because: (a) It was a standalone greenfield network without the need to hand-off for two other previous versions of GSM networks, (b) it had a larger footprint, (c) it benefitted from better backhaul, more fibre and less microwave, (d) HSPA is in fact a CDMA derivation and so the Bell/TELUS engineers had sites in the right places and a flatter technology learning curve.  Finally, while Bell and TELUS had individually underspent Rogers on network CAPEX, together they have easily outspent Rogers.  In our opinion, together they have created one of the best wireless networks in the world.

At first only engineers and insiders knew the Bell-TELUS network was better, then Rogers no longer had a factual basis to advertise that they had a better network, now most young users know the network is better and soon everyone will know that the Rogers network is not as good.  This would not be an issue if Rogers had loyal customer base, the best in-store experience or the most fantastic customer service, but they do not.  In fact disgruntled dealers have served customers worse; Rogers have made a series of changes in the management of the sales organization and a quick search on twitter #Rogers yields screens of really unhappy customers.

Churn

While Rogers only recently earned the top spot of highest incumbent postpaid churn, because they have always had a bigger base, they have consistently lost the most customers.

Cumulative postpaid churn over the last 12 months

Cumulative postpaid churn over the last 12 months

To be fair there has been the odd quarter where Bell has lost more customers than Rogers, but as the charts show, Rogers had stayed way ahead on volume of churners.

Share of incumbent postpaid churn

Quarterly share of incumbent postpaid churn

Everyone in the industry focuses on the percentage number, which is a good comparator, but does not tell the whole story, because the more customers an operator churns in any quarter, the more new customers they need to sign.  Considering each new customer costs a Canadian operator around $400 to sign up in terms of marketing and handset subsidies, this means Rogers is spending $500m per annum just to keep its subscriber base flat.  Growth is on top of this.  Even worse, Rogers appears to be losing the very highest ARPU customers and is replacing them with middle of the road smartphone customers, which are nothing to complain about, but they do not have the same LTV as the customers they are losing.

 

End of period smartphone share

Incumbent end of period smartphone share

Gross

The only way to keep growing when your churn is higher is to sign up more customers.  i.e. higher gross adds.  This is achieved through more advertising, more subsidies and more distribution.  But Rogers has been on the back foot with distribution and this is a long lead time lever to pull.  With Bell blowing the lights out on advertising because of the Olympics, both TELUS and Rogers lost gross share to Bell.  The only upside in not getting your fair share in gross is that it improves your EBITDA because you have to subsidize fewer new handsets.  But Bell seems to have won more than their fair share of the iPhone 5 customers as a consequence.

Share of incumbent postpaid gross additions

Share of incumbent postpaid gross additions

 

Nets

The combination of lower than normal gross and churn was a much lower share of postpaid nets.

Incumbent postpaid nets share

Share of total incumbent postpaid nets

This is not only a continuation of the postpaid nets losing streak that started in Q4 2009, but also in recent years, Rogers has had a better Q3 postpaid nets share than the following Q4.  We hope and expect that this Q4 will be better for Rogers.  We expect this because perhaps Bell spent most of their annual advertising budget in the last quarter and Bell stores certainly look empty relative to Rogers and TELUS stores.  But after TELUS took their eye of the gross ball in Q3, we are expecting them to come out to win their fair share.

 

Financials

One of the positive consequences of not getting enough gross is improved EBITDA.

Share of Incumbent EBITDA in quarter

Share of Incumbent EBITDA in quarter

We believe it would be better to invest in gross and retention rather than generate higher margins.  This is particularly true when there is a new network technology (like LTE) or new iconic handset (like iPhone 5 and Samsung Galaxy S III) which can be a catalyst to steal share.  They say make hay while the sun shines.  In the wireless business case, hay = subscribers.  We believe that Rogers will also have to invest more in their networks.  Without this they will not be able to compete with Bell and TELUS.  Unfortunately it is currently fashionable to return oodles to shareholders right now and while Rogers is not in a weak financial position like Shaw or MTS, surely it does not seem prudent to focus on share buybacks at record high share prices since the founder’s passing, only to sell again at a lower price when you need the funds to buy spectrum or invest in network?  If our last name was Rogers, we would be investing in network.  It worked for Rogers in the past, it has consistently worked for Verizon and more recently for Telstra.  To win in wireless you do need to have both the best network or at least the perception of the best network.

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