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    Billion-dollar war - MTS fighting to become next national cellphone carrier  
    Winnipeg Free Press  
   

Martin Cash

 
    December 01, 2007  
   

MTS Allstream is girding itself for the battle of its life, preparing to spend up to $1 billion to build a national wireless network.

But first MTS has got to figure out how to power its way through the rest of the pack of hungry telecommunications players such as Shaw and Videotron to become Canada's fourth national cellphone carrier. Those companies also see opportunity in the new national wireless spectrum auction announced by Ottawa this week to secure their future growth potential.

We now know that the latest auction for wireless spectrum will let new players into the game. What we don't know yet is just what strategy MTS and the others will deploy to get there.

"MTS was the big winner," telecommunications consultant Iain Grant said after Industry Canada announced that new players will get some of the national wireless action, while the old guard -- Bell, Rogers and Telus -- will have to share tower space and allow roaming rights on their networks.

MTS may have won that battle, but the war for the ultimate prize has just begun.

The auction occurs in May.

Just like the pitched battle it waged and won in 2004 when it bought Bell's competitor Allstream out from under Bell's nose for $1.5 billion, MTS is up for the challenge.

Since that time, the Winnipeg company has been the regular subject of takeover rumours. Bulking up with a national wireless offering will likely keep those hounds from the door, by transforming it into a stronger standalone business entity that would be more expensive for a competitor to try to swallow.

"The opportunity for a fourth national wireless player in Canada is significant and has the potential, under the right circumstances, to create significant long-term value for MTS shareholders," Pierre Blouin, the company CEO, has said.

MTS derives more than 10 per cent of its revenue from its provincial wireless service, but it represents an even more significant portion of growth for the company as local- and long-distance revenues decline.

Wireless is the golden grail of the telecommunications business and analysts such as Grant said they believe there is room for penetration to double across the country and usage to increase as much as four-fold over the next five years.

Many believe that wireless customers in Manitoba and the rest of the country will be the big winners. Saddled with higher rates than in the United States and Europe and fewer options and services, analysts say the addition of new competition forcing down prices will free up plenty of pent-up demand.

Grant said the days will soon be gone where Canadian cellphone users will utter the phrase, "Let me call you back on my land line" because they are afraid their cellphone rates are too high.

MTS officials and others applauded Industry Minister Jim Prentice this week for his courage to disregard the admonitions of the incumbents who wanted to keep out the competition. Instead, he has agreed that more players will spur innovation, investment and lower prices for wireless users.

"The government has put a framework in place where 'let 1,000 flowers bloom,'" said Grant.

Greg MacDonald, an analyst with National Bank Financial, agrees to some extent, but is circumspect when it comes to the impact on consumers.

"My conclusion is that the possibility of an all-out price war is not that high," MacDonald said. "I think you will find these guys are more rational than what the market thinks."

For instance, he said he believes the significant sell-off of Rogers and Telus shares this week was an irrational response from investors who think the incumbents are automatically going to lose cash flow to new wireless competitors.

MacDonald said if MTS did win a national wireless licence, it might want to develop a suite of wireless services for its national enterprise clients now served by its Allstream division, rather than immediately start low-balling the incumbents with cheaper consumer cellphone rates.

"You have to earn a return on investment," he said.

How this plays out will likely set the stage for MTS to be able to decide its own fate for the future -- or not.

Wireless data prices

Wireless data plans in Canada are more expensive than in the United States and Europe, but according to the SeaBoard Group, there have been "breathtaking" declines in prices over the last few months.

* As recently as this summer, most wireless services in Canada were only offering data plans of 5 megabytes (MB) to 10 MB of data throughput a month -- anything over that was charged at a high per kilobyte or megabyte rate. While Canadian service providers still don't offer unlimited data plans, they now offer 1 gigabyte plans and prices have come down dramatically between June and November of this year

Rogers to $1,580 from $2,600

Bell to $100 from $2,350

Telus to $100 from $2,350

However, those 1 GB monthly plans in Canada are still more expensive than most U.S. services, which are for unlimited data throughput. The following U.S. monthly data plans are for unlimited use:

AT&T $44.99 US

Verizon $49.99 US

Sprint $59.99 US

T-Mobile $39.99 US

Leap $50.00 US

MetroPCS $50.00 US

European carriers offer a wide selection of services and since the recent introduction of the iPhone, some have started to include unlimited usage plans. The following rates are for 1 GB plans :

Base - Belgium $27.30

TMN - Portugal $24.50

KPN - Holland $55.30

Cosmote - Greece $79.70

-- Source: The SeaBoard Group

The Canadian

wireless industry

$36.1 billion -- total annual revenue in the telecommunications sector

$12.7 billion -- total revenue in the Canadian wireless business in 2006

15.2 per cent -- growth in Canadian wireless revenue from 2005 to 2006

10.2 per cent -- increase in the number of wireless subscribers from 2005 to 2006

18.7 million -- number of wireless subscribers in Canada

58 per cent -- percentage of Canadians who are cell phone subscribers

Canadian Wireless

vs. the rest of the World

* According to the OECD Communications Outlook 2007, the average Canadian wireless service package that was most comparable to those in other countries was more expensive than in eight other countries, including the U.K. Sweden and Denmark.

* In 2004, Canada was second to last in OECD ranking of cell phone penetration at 47.2 per cent, compared to 61 per cent in the U.S., 62.6 per cent in Australia, 90.9 per cent in Norway and 102.8 per cent in the U.K. (with some people owning more than one phone). Canada's penetration went up more than 10 per cent to 58 per cent in 2007, but the U.S. rate went up by 16 per cent.

* Cell phone penetration is lower in Canada, and usage is as well -- the average minutes of use per month in Canada is about 420, compared to 800 in the U.S. The OECD average is 354.

-- Source: Industry Canada and Canada Gazette, Feb. 27, 2007, reply comments of MTS Allstream

 

Potential bidders for new wireless spectrum

Manitoba Telecom Services Inc. -- MTS has long seen itself as a potential front-runner to become the fourth national wireless carrier. It already controls a significant share of the cell-phone market in Manitoba and it has a captive client base of national business customers in place for its sophisticated enterprise telecommunications services. Many analysts say they believe that Industry Canada's decision to set aside a portion of the new spectrum to be auctioned of for new entrants favours MTS the most. MTS CEO Pierre Blouin has said the company would consider spending as much as $1 billion to achieve that goal.

Shaw Communications Inc. -- The aggressive Calgary based cable/high speed Internet and digital telephone service company has consistently taken every growth opportunity that technology and the regulators have provided. It will be most keen to establish wireless licences in Western Canada to sell to its existing client base in that part of the country where it has been going toe-to-toe with Telus for many years.

Quebecor Inc. -- Its cable/high speed Internet/digital telephone division, Videotron Ltd., has already pledged to spend $500 million to build out a competitive wireless network in Quebec. Analysts say it would have opportunities to develop plans in that province that could feature, for instance, long distance packages for calling inside Quebec.

EastLink Corp. -- The Halifax-based Maritime cable/high speed Internet/digital phone operations would also likely try to secure licences within its current client catchment area of the Maritime provinces.

Yak Communications Corp. -- The small Toronto discount long distance company has declared its intention to become the first "no contracts, no gimmicks" wireless provider in Canada. Yak may be one of many smaller niche players who only bid on regional licences.

Bassett Media Group -- This Toronto-based digital signage company is another example of the possibility of niche players adding specialized competition and services to the Canadian wireless market.

MTS Today

In 2006 MTS generated $1.9 billion in revenue including $234 million from its provincial wireless business. It still generates close to $1 billion in local and long distance fees, but both those areas are declining every quarter as the number of competitive options increase. Its television revenue is growing strong, but it has started from scratch and last year generated only $32.2 million in revenue. Its national data services through Allstream produced $660 million in sales, but continues to struggle.

What it will take to get into the national wireless business.

CEO Blouin has said the company would be willing to spend $1 billion on the chance to become the country's fourth wireless carrier. Analysts say it's too early to say what it will take, but most agree the licences themselves will cost hundreds of millions of dollars. Then there will be infrastructure and marketing costs to handle the roll-out as well as whatever fees are negotiated for tower sharing and roaming rights.

What might the new business unit look like?

Industry insiders say every manner of scenario is possible. MTS could team up with others -- Videotron and EastLink for example -- and split the country up to share the risk of being a national wireless player. Some say the May 2008 auction might be an opportunity for international wireless players like Vodaphone or T-Mobile to buy a minority stake in a new Canadian wireless business.

 


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