August 2012

iPhone 5 Launch date

iPhone 5 Launch date

Today reports in the WSJ suggest that Sharp has fallen behind on the production of the iPhone 5 screens.  This will almost certainly impact the launch date and will impact iPhone 5 supplies.  Does the date of the iPhone 5 launch matter to Canadian wireless carriers?  We think so:

Launch in Early September?

If the iPhone 5 were to be launched in early September and there were no availability issues (Rogers reported these with the 4S), then we think this would be better for the carriers.   We think this has been a relatively quiet period in terms of new loads and churn for all the carriers, following the best churn quarter ever in Q2 2012.   Our hypothesis is that churn was low because many customers are waiting for the new iPhone.  So an early launch would mean that churn and gross would both increase in Q3, which would not be a bad thing considering how they have already had two very quiet months in Q3.  The churn and COA will be spread over two quarters.

Launch in early October?

Most churn will come in one quarter and Q4 is normally a big quarter anyway.  Ardent Apple-philes could offload their 1 year old 4S to get the newer device causing a second wave of carrier independent churners.  All the churn, COA and seasonally higher retention spend will occur in Q4.


Most reports suggest either Sept 12 or 21 as the announcement date.  It is probably fair to add two weeks for first availability and another two weeks for reasonable volumes in Canada.  Timing will make a difference.  EBITDA margins should be lower due to higher COA and retention spend in the quarter that Apple releases their next device.     This could impact short term investors.  Either way, incumbent wireless carriers could have the best and worst financial quarters in the same year.

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RIM not looking good

RIM is not looking good.  Not much more to say.  Pretty sad.  Note that RIM’s percentage is of top 11 handset OEMs.  Together the top 11 account for 80% of overall market.

RIM shrinks

RIM is not looking good

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Disappearing Canadian Landlines

Disappearing Canadian Landlines



Churning landline customers are leaving telcos, but they are not going to cable

For the last 14 consecutive quarters, the telecoms companies of Canada have lost more subscribers than the cable companies have gained.   This had happened a few times in the past, but was put down to timing like moves in Quebec.  The real driver for telecoms landline losses was cable.  Not anymore.  In Q2 2012, Bell, TELUS, MTS and Bell Aliant lost nearly 188,000 landline subscribers between them.  In the same period, Rogers, Shaw, Videotron and Cogeco only added 56,000 cable telephony subscribers.  Note that MTS actually added landline customers, something that has happened every Q2 for the last six years.

Canadian landline subscribers

Telcos are declining and cablecos increasing, but not at the same rate

Fixed wireless substitution

In previous quarters telecoms executive have put this down to customers increasing reliance on wireless.  This makes sense with improved wireless coverage and speeds for wireless data (since many took a landline because they needed the internet anyway and cable companies offered landline for as little as $10 extra if you took a bundle), but it is not supported by the data.  The last CRTC published number of 13% wireless only households in 2010 was significantly below the USA equivalent at 25% at the same time.  We also have not seen an uptick in incumbent postpaid subscribers that one would associate with wireless only households.


Anatomy of a wireless only household

Why would we expect the wireless only subscribers to be postpaid and with incumbents? If you only have one phone, firstly it would need to work at your home with good in-building coverage.   New entrants WIND and Mobilicity have less coverage and weaker indoor signals due to less effective AWS spectrum.  If we further assume that many wireless only households will also be in condos as this demographic is more likely to be comfortable relying on wireless, they would probably have to sign up with an incumbent to get coverage above the 5th floor in a concrete and steel structure.  So why postpaid rather than prepaid?  Well assuming this demographic wants a smartphone that will serve all their household needs, they will want the handset subsidy and voice/data plans that can support all their needs.


The numbers

As you can see from the chart the telcos continue to shed customers in business and consumer.  At the same time, the cablcos are not growing their cable telephony bases.  If they are not going to wireless, we can only assume that they are going to smaller VoIP providers.

Landline net adds

The telcos continue to shed customers, but they are not all going to cable companies

 VoIP providers

There is a growing number of small CLEC and VoIP providers.  Many of these offer very reasonable termination rates, Long Distance at the same price as local and significantly lower MRC.  In addition all of the features like voicemail, caller ID and 3-way calling come standard.  Starting a CLEC or VoIP provider has never been easier and the low capital requirements mean many can offer services at much lower rates, but customer acquisition is still a problem.  Particularly in an industry where the same telcos and cablecos dominate the media which is required to advertise your services and create a new brand.  Even reasonably well funded wireless new entrants have struggled to create a proposition where you can acquire a new customer at an investment that makes sense.  It might make sense for a company like Bell to acquire a new wireless customer at $400 since they will make this back in the year and have financing at a cost of capital less than 3%.  For a new VoIP company to make a return the acquisition costs per customer need to be significantly lower, probably less the $20 per customer.  But $20 per customer does not even get you the first page of a Google search, which relegates them to word of mouth, radio and affordable outdoor advertising.   But these media also have a self selection problem, so they attract the wrong customers, who they never make any money from.



Telcos and eventually cablecos will continue to lose customers to wireless and better VoIP providers.  According to the CRTC there are 605 licensed VoIP providers that must establish brands and this probably means significant consolidation to get economies of scale.  Ironically VoIP providers need very little scale to provide a service, in fact this is one of their competitive advantages against the ageing technology of the landline.  But they do need scale to achieve customer acquisition at a reasonable investment.

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Prepaid’s declining relevance in Canada

Prepaid’s declining relevance in Canada

Looking at the last few years there have been some dramatic changes in prepaid in the Canadian market.   Canada might already have the lowest percentage of subscribers of any market we know.   The chart below shows how Bell, Rogers and TELUS compare with Vodafone operators in 21 countries.   This chart shows that only the UK, Spain and the Netherlands have less than 50% prepaid and Italy has 82.5% prepaid.

Prepaid as percentage of total subscribers Vodafone vs. Canada

Canada remains a postpaid market in a prepaid world


Trending lower

All of the incumbent carriers are shedding prepaid customers in favor of postpaid customers, while the new entrants engage in a price war for the bottom end of the market.   Bell has consistently being moving away from prepaid since Q3 2007 and only increased before this on the back of Virgin.  Rogers has been moving towards postpaid consistently until the introduction of their second fighter brand chat.r and TELUS increased their prepaid mix with the introduction of Koodo, but prepaid percentage has been declining for all incumbents recently.

Prepaid Net Adds for Canadian Incumbents

Incumbents look to be exiting the prepaid business. Bell has not had positive net adds in prepaid for 10 quarters, TELUS only once in 6 quarters.

ARPU & Churn

Since prepaid is becoming a less significant part of the overall customer base, it has positive impacts on two key metrics:  Churn and ARPU.  The recent success in the incumbent blended ARPU increases and blend churn declines can in part be attributed to a smaller base of prepaid subscribers.


Prepaid as percentage of total subscribers - low and trending down

All incumbents are shedding prepaid subscribers


It seems like the incumbents have made a strategic decision to move away from prepaid.  They have managed to entice many more subscribers into expensive postpaid plans by offering great subsidies in return for a 3-year contract.   So fickle subscribers who might be switching prepaid SIMs in other counties are instead stuck with a carrier sponsored SIM-locked high-end device.  This has led to higher rates of smartphone adoption and our carriers offer some of the best network coverage, quality and speed on the planet, but at a price.  The incumbents have very cleverly isolated the price war to lower end devices, on slower networks with less coverage.  So the new entrants fight for fickle customers who will leave to save a few cents, while the incumbents have managed to keep healthy margins and maintain their already high price per minute and price per megabyte charges.



It seems hard to believe that Canada is so different in terms of the overall market structure, yet the incumbents are going from strength to strength by playing by a different set of rules to the new entrants.   Despite much help from our government, finance and knowledge from abroad, the new entrants have been unable to re-invent the Canadian wireless landscape.




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Bell Q2 2012 Results

Bell Q2 2012 Results

Wow, another great quarter from Bell.  They really seem to be executing at a new level.  I bet the private equity firms who were going to buy BCE are kicking themselves right now?

Gross Adds

Gross adds were good for Q2, although down 10% Y/Y and down 4% for postpaid gross, but so were Rogers (down 14% and down 7%postpaid) and TELUS (down 12% and down 8% postpaid).


Net Adds

Overall Nets were up a healthy 29% up at 47,208 which was significantly better than Rogers and TELUS who both has lower nets Y/Y.  But one should take into account that Postpaid Nets were only up 8% at 102,067 and that the lower net losses on prepaid drove most of the overall net growth.  Bell has now had 10 consecutive quarters of negative nets in prepaid.  In fact the prepaid base is shrinking so quickly, it is improving blended churn and blended ARPU metrics.  By comparison, Rogers was down 70% Y/Y for overall nets and down 19% for postpaid nets, from 108,000 to 87,000.   A solid adds quarter for Bell considering the market.



Blended churn improved dramatically from 2.0% last Q2 to 1.7%, the lowest since Q2 09, or 12 quarters!  This is a very good result, but before we celebrate too much, both Rogers and TELUS (Q2-11:1.67% down to Q2-12:1.39%) also enjoyed good churn improvements, suggesting that there might be more than meets the eye.  Firstly since Bell has a much small base of prepaid subscribers, their impact on blended churn is less.  Or calculations suggest that as much as 25bps of blended churn can be attributed to the shrinking prepaid base.  Secondly and more significantly, we believe there were few churners in many carriers, including Verizon and AT&T who had their best churn numbers in many years.  We think this is the iPhone 5 effect.  Despite enormous success, many Androidphiles waited for the prices to drop on the Samsung Galaxy S III, which is probably the best phone ever made…so far.  At $700 without a contract and over $200 on a three year contract, the Samsung Galaxy S III is still a very expensive Android device.  A recent survey showed that up to 90% of current iPhone users intend to upgrade to an iPhone 5.  So anyone who has an Apple device did not move carrier this quarter.  The same goes for RIM, where loyal RIM users see no reason to change carriers until a new RIM device emerges.  We suspect they will wait for BB10 before moving.  If we assume that Apple has about 30% market share a year ago and RIM 40%, at least 70% of smartphone users are playing a waiting game.  So we believe that all the smartphone churn was probably subscribers leaving RIM to go to Android?

Blended Churn Share Incumbents Bell

Bell’s share of blended churn increase sequentially but was down y/y

In a quarter where all carriers move in the same direction, share is often the best way to determine the winners and losers.  From a share of churn perspective, Bell and TELUS were down Y/Y but only Bell was up sequentially over Q1.  The pattern is the same, but more dramatic in postpaid churn.  Bell’s share of postpaid churn was up to 34.1% (Q2-11 was 32.8% and Q1-12 was 32.4%).  While Rogers still lost the most postpaid customers, they have a larger base.  See the charts.

Postpaid Churn Share Incumbents

Bells share of postpaid churn increases




Blended ARPU was up a healthy 4.5% of blended ARPU growth.  Bell says a combination of lower voice and higher data revenue growth of 31.1% pushed the Blended ARPU higher.  While we are impressed with the data growth, the voice declines are not good news especially considering that Bell had an unusually good quarter in terms of MoU improvement of 7% Y/Y bringing this metric North of 300 for the first time since Q3 2009.  As with churn, some of the Blended ARPU improvement can be attributed to a smaller prepaid base.  We have not done the math yet, but will update once we have.  Either way, ARPU growth is always a good thing especially when Rogers is experiencing ARPU declines in the same market conditions.


Revenue and EBITDA

Revenue was up 6.7%, mainly due to more subscribers, more smartphones and more data usage.  Bell’s wireless EBITDA grew a huge 20.9% to $556m.  This is a fantastic result.  Bell says it is the best since Q1-07, but this might actually be the best ever?  Don’t forget that this was on the back of lower gross and churn, improving both COA and COR spend.  COA per subscriber was also lower and Bell has been working hard at their costs.  A great result, well done.


A great quarter, difficult to find anything wrong with it.  Well done.

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