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Why Verizon’s prices will indeed be lower

04 Jul

verizonThose goofy, Verizon-denying Bay Street analysts are at it again. Last week’s sell-off of Bell, Rogers and Telus on word that the U.S. telecom giant is coming north – news that wiped more than $6 billion off their market values – has created a something of a buying opportunity on those same stocks, according to Canaccord Financial.

Verizon’s effect on Canada, should it ultimately enter the country, has been overstated, analysts Dvai Ghose and Sanford Lee write in a note to investors. The company is likely to focus on high-value (read: overpaying) enterprise customers, meaning that it’s not likely to make a big dent in the Big Three’s business by driving prices down in Canada overall.

“These differences are important for investors, consumers and the government, which may be naively assuming that Verizon is the savior for wireless competition in Canada,” they say.

It’s worthwhile pointing out these were the same analysts who, fingers stuffed in ears, steered investors wrong by refusing to believe the news reports of Verizon’s interest in Canada. When it turned out the company was indeed offering at least $700 million for Wind and is also holding talks with Mobilicity… well, let’s just say there were some red faces on Bay Street.

To suggest now that Verizon’s entry – which is certainly far from a done deal – won’t amount to much if it indeed happens is incredulous at best and misleading at worst. There are at least three good reasons why the company would have a major impact, and why there’s no upside whatsoever to Canadian telecom stocks should it come to pass.

Cost advantages: It’s been remarked that Wind, when it started up a few years ago, touted a big cost advantage in how it could do business. Thanks to its relationship with quasi-parent Orascom, Wind was supposedly going to be able to draw on that company’s size and clout – more than 100 million customers through various subsidiaries worldwide – to secure discounts on phones and network gear. Doing business was therefore going to be a lot cheaper for Wind, which would allow it to offer services for less than the Big Three.

The problem is that Wind had to use AWS wireless spectrum in Canada, which runs on a frequency that few if any of Orascom’s subsidiaries use elsewhere. While the scale advantage was nice in theory, Wind’s spectrum disadvantage ended up nullifying it since it couldn’t really piggy-back on the phones and network gear Orascom bought for use in bigger markets.

Verizon, on the other hand, stands to be in full alignment with Canada. The company is currently using both AWS and 700 MHz spectrum in the United States, the second of which is conveniently being auctioned here in Canada early next year. Assuming Verizon buys a bunch of that, it will indeed be able to bring its huge heft – its own 100 million customers – to bear in securing discounts on phones and network gear. After initial setup charges, its ongoing costs will indeed be much lower than the Big Three’s.

Government intentions: The only way the federal government could be any clearer about what it expects from Verizon is with a George Bush senior-like statement. Read my lips: lower prices.

Industry Minister Christian Paradis, basically a spokesman for the PM himself, has repeatedly said he wants four strong carriers in every market. That’s not just because he has an arbitrary love of the number four, it’s because he wants the greater competition – and therefore the lower prices – that an additional player is sure to inject.

How would the government respond to a foreign company that comes in and merely mirrors the Big Three’s pricing? Not favourably. The government is borderline hostile to the telecom companies as is. That’s surely not a message lost on potential new entrants, as it clearly is on some analysts.

Moreover, as Michael Geist notes, it’s hard to imagine how Verizon won’t reshape pricing in Canada, what with its ability to offer North American-wide voice and data roaming. Going back to cost advantages, the company is going to have a big edge in this regard over Canadian carriers, who stand to lose a ton of roaming and long-distance revenue. They simply won’t be able to compete, which means they’re going to have to sharpen their pencils in other ways.

The other intriguing likelihood is how Verizon’s entry could interplay with the upcoming Wireless Code of Conduct, which will limit cellphone contracts to two years starting in December. While Canadian carriers are probably gleefully relishing the idea of raising rates once the rules take effect, especially on the upfront cost of phones, it’s hard to imagine Verizon pulling the same move. How exactly would the company rationalize charging more for devices in Canada than down in the United States?

The company’s presence would likely discipline Canadian carriers against hiking prices come the end of the year, or at least bring them back down once it’s up and running.

Network reality: If there’s one really good reason for why Verizon won’t simply focus on higher-value enterprise clients, as some are suggesting, it’s because it can’t. The reality is, no one can just show up and start charging enterprises a lot of money for services because, believe it or not, businesses are a lot more demanding than average, every-day consumers.

Companies demand good, reliable service, and that’s something that takes a long time to build up. It may in fact be impossible to do with just AWS spectrum, which doesn’t penetrate walls all that well.

My own experience is a good example. Like many Canadians, I wasted no time in switching over to a new entrant when they first started up. I stuck with the company for about two years, but ultimately switched back to the Big Three. As someone who’s self employed and depends on constant up-time, I couldn’t take the constant hiccups in my service and inability to roam in certain places. And I’m way more forgiving about this stuff than the average business person.

That’s why you’ll find very few non-cash-strapped business users on new entrant networks. That will continue to be a reality for Verizon at least until it can get a 700 MHz network up and running, and probably for some time after that. The company will need to build many more cell towers, secure more back haul capability and improve billing systems before it can even hope to offer enterprise-level services. And maybe even then it won’t be able to, simply because it may not have enough of that spectrum to provide service that is solid and reliable enough for such users.

Say what you will about Bell, Rogers and Telus, but their networks are fast, robust, widespread and reliable. Any competitor will have that disadvantage to deal with for a long time to come. They’ll have no choice but to cater to less-discerning – and more cost-conscious – regular consumers, otherwise known as the Big Three’s bread and butter.

So has Verizon’s potential entry into Canada created a buying opportunity on other telecom stocks? Only in the bizarro land that some Bay Street analysts seemingly inhabit. The only way the Big Three’s stocks become attractive again is if the U.S. company’s entry ultimately doesn’t happen. Until then, it’s delusional to think Verizon won’t have a major impact on prices and therefore existing players.

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5 Comments

Posted by on July 4, 2013 in telecommunications

 

5 responses to “Why Verizon’s prices will indeed be lower

  1. Jean-François Mezei

    July 4, 2013 at 12:56 am

    I think it is way too early to tell. Because those are spectrum *auctions*, a strong new entrant may game the auctions to cause prices to rise. Because of how LTE works, Bell and Telus HAVE to had adjacent bands. Rogers and MTS, Rogers and Videotron too. Cue Verizon and a disruptive force.

    Say Bell bids on A. Telus wants B to b next to Bell, but Verizon outbids it and Telus is stuck on C. The only way for Bell and Telus to get decent LTE speeds is to strike a deal with Verizon for network sharing to combine A B and C. Verizon instantly gains a national network.

    And by the time the oft delayed 700mhz auction is done and network actuallturn on antennas, LTE might have voice on it, allowing Verizon to deploy an LTE only network in Canada on 700 and once it has finished converting Wind customers, deploy it on 1700 as well.

    At the end of the day, we have to wait to see if Verizon makes an actual bid for Wind, and if accepted, what sort of game it will play at auction. Until then, Verizon will keep its *real* plans for Canada quite secret and let us speculate all we want.

    Remember that they are justr in talks now. Not even sure if got to the stage where Wind has opened its kimono to allow Verizon to look at its books and operations.

    Would Verizon make an investment in Wind and remain a small two bit operator in a couple of cities ? Or is its real plans a strategic entry to force it way into national network riding on either bell/telus or Rogers’ towers with its spectrum contribution ?

    I bet Verizon is having lunch wth government to convince them that Rogers buying Shaw’s spectrum would have too much concentration and that they should block it and let Verizon buy it.

    The real question are Videotron and Eastlink. How would Verizon deal with them ?

     
  2. Torontoworker

    July 4, 2013 at 9:02 am

    “It’s worthwhile pointing out these were the same analysts who, fingers stuffed in ears, steered investors wrong by refusing to believe the news reports of Verizon’s interest in Canada. When it turned out the company was indeed offering at least $700 million for Wind and is also holding talks with Mobilicity… well, let’s just say there were some red faces on Bay Street.”

    Someone made a ton of money on the down – then up of these stocks… Was it ‘engineered’??

     
  3. Marc Venot

    July 4, 2013 at 1:19 pm

    The one that can find a way so Canada keeps her appearance of sovereignty but open the market to the international competition win.

     
  4. Michael Elling (@Infostack)

    July 4, 2013 at 5:12 pm

    What if they offer free or nearly equal roaming rates to US subscribers whose smartphones can roam easily onto Wind’s AWS frequencies? Then its the dog’s body shaking the tail and not the other way around. They get more value attracting US subscribers (and snowbirds) who purchase their phones in the US and like flat rates or seamless coverage (common phone) into Canada. As I maintained earlier, it is foolish to believe that VZW would be a price leader in Canada.

     
 
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