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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Rogers: Do headcount reductions make financial sense?

Rogers:  Do headcount reductions make financial sense?

Many of our Canadian telecoms and cable companies have all done significant headcount reductions in the past few years.  Does this improve their margins?  Is it indeed better for the businesses?  Is it better for the economy?  Is this the best way to improve productivity?


The numbers

We will work on this, but think the numbers will show that there was no improvement in the numbers of any company that has let a lot of employees go.  To be updated.


Where does the work go?

Even if we could get the numbers to work, which we will not, when you lay people off where does the work go?  Either the work has to be done by existing employees or it has to be done by someone outside of your organization.   It the job cuts were poorly executed (and we have yet to see well orchestrated job cuts) then managers and executives will look to the remaining employees to pick up the slack.  This can be done by existing employees working more efficiently or longer hours.  Since most front line employees are effectively paid an hourly rate, working longer equates to overtime, which can actually end up costing organizations more.  So can employees suddenly faced with an incremental work load and no new tools suddenly improve their productivity?  Maybe some people.  Some seem to flourish under pressure and get creative, find new ways to tackle age old problems.  But we believe that in survival mode, which is the automatic fight or flight response of employees left behind when some of their colleagues and friends are let go, most employees do not improve their productivity.

So this leaves other companies to do the work that was once done by the employees you let go.  This can be a proactive decision like outsourcing the work, or a negotiation with suppliers or you can download the work to your customers.  In our experience outsourcers generally do not do a better job than any companies own employees.  They can however do it cheaper.  But cheaper often has a downside.  The jobs are moved overseas (not good for the overall country or regional economy), or the outsourced employees are trained less (creates potential customer aggravation) or paid less (paying less can be in the contract length, the hourly rate or in fewer benefits).  Paying less for employees usually means that you are not getting the same quality of employee or you have unhappy employees that have no loyalty and will move at the first possible opportunity.   When a company outsources work, the new employer now has to make a margin on the employee, because this employee has moved from a cost center to a profit center.  To achieve this, the outsource company needs to have some cost advantages.   This makes sense when there are many small companies who have similar needs like an alarm monitoring center, where the outsource provider can offer scale to the many small home security providers, but who has better scale than our telecom and cable companies?  India.  So the only way for an outsourcer to make money is for them to pay domestic employees less, train them less or send the jobs abroad.

The impact on the organizations

We have not seen any situations where job cuts are seen positively by employees.  Neither those who lose their jobs nor those who are left behind benefit.  Moral always gets worse.  Bad news travels fast.  When morale is poor within an organization, the front line feels it immediately.  But these are the employees that are selling, supporting and talking to your customers everyday.  They are the face of the organization.  When they are worried about their jobs and taking on the additional burden of the employees work that you let go, their stress levels increase and probably do not have the time or inclination to treat your customer better.  They do not have the time to get to the route of the problems, the time to design products and services as well, the internal feedback loops to ensure and improve quality.  All organizations have many processes, procedures and learnings that undocumented.  Even the best run organizations have much of the inertia and organizational memory in the employees.   When you let employees go en mass, you lose learnings, processes, understanding and relationships.  Relationships with suppliers, partners and customers not only leave your organization, but will frequently go to competitors.   Having to form new relationships is expensive in terms of time and money.  Friction costs between suppliers and partners increases.  With organizational memory gone, company make the same mistake that they had previously learned from and their overall risk increases.

The impact on the communities

When large organizations let many people go all at once they can impact the local community in many ways.  Firstly if a whole call center were closed, for example, then the local community might lose one of their biggest employers.  Employees have to travel to alternative work, and local businesses suffer from the dual impacts of lower consumer spending and fewer local customers.  Finally this impacts a company’s customers.  When a family’s breadwinner works at Rogers, you can bet that their friends, immediate family and neighbors all have Rogers services.  After being let go, a former employee is unlikely to recommend their former employer, in fact they might even switch all their services to a competitor.  This has seriously negative ramifications for the company, who used to enjoy a small army of advocates, who now at best say nothing and worse if they could have negative experiences to share.   We already know that it takes almost 10 times as many positive recommendations to net out a single negative comment from consumers, so letting 500 people go could lead to 5,000 negative comments, which would take 50,000 positive experiences to net out!

The impact on the economy

Perhaps the biggest unknown is the impact on the economy.  This has already become a big issue in the USA and we believe will impact Canada sooner rather than later.    When large organizations downsize or cut jobs to improve margins (and those margins are already in the high 40% range!) this is actually a transfer in wealth from one group of stakeholders to another.  It is a wealth transfer from employees to executives and shareholders.  At the very least this is immoral, but worse, we think it could become a contributing factor in overall economic decline.  The biggest problem is that the companies are not paying the very customers who would buy their services.  Assuming all these people find new work, but not immediately or at a lower wage, total middle income declines.  Without wage growth in the middle income wage earners overall (both lower employment and lower wages per employee), there is less disposable income to buy the very products and services that these companies produce.  So sales erodes, which causes belt tightening in companies, which in turn means companies spend less, which means they do not hire and so the decline spirals.  In fact for our economy to recover we need the companies to invest more and hire more people.

Getting back to the immoral part, we could probably find many at least one example from each of our telecoms and cable giants where they had laid off workers to improve financial performance.  For fear of retaliation, we would not like to single anyone out, but suspect that the executives leading these companies might have also been paid a bonus in the same time period that the lay-off occurred.  This seems counter intuitive at a human level, but it also fails an economic test.  Let’s say for example that 1,000 workers are let go and the savings are $50m but the executives get paid an extra $20m in bonuses and the shareholders get the benefit of the remaining $20m (assumes all savings go to free cash flow and the is a payout ratio, dividend increase or share buyback returning 2/3 of savings not paid to executives).  The incremental earnings to shareholders are so insignificant that the savings alone will not impact their investment, although the sentiment might change if investors think you are a cost conscious organization.   And what do the executives do with the bonuses?  They save it or invest it, but they do not spend it.  Employees would have spent most of their wages.  A thousand employees will limit their discretionary spending, so water, heating, air conditioning, food, gas and entertainment spending all go down.  Yes the executives might take an extra trip, but this does not make up for the thousand employees who did not spend.  So the economy shrinks.  The public sector economy also shrinks.   A marginal $50m in payroll results in significant income and spending taxes for our federal and provincial governments.  The same dollars in executives and shareholders hands is invested in ‘tax saving’ plans or in lower taxed dividends or in more equity.  No matter what the government coffers are reduced when payroll declines and profits increase.

In terms of the fundamentals of economics of capitalism, yes businesses should be created and run for a profit motive, but mass layoffs from all companies would certainly ensure self-inflected destructions.   Without a large and growing middle income group of earners, there is nobody to buy our products and services.

Time for companies to consider other stakeholders?

We think most shareholders want to invest in companies that will continue to survive, grow and prosper, but do not believe that smart investors are interested in short term cost cutting that will injure the business, the community and economy in the long run.  We believe that despite lagging on productivity in some areas, our Canadian businesses are pretty well run.  We can envision a Canada where other key stakeholders like employees, suppliers, communities and the economy itself are considered.  Good companies should strive to increase their average payroll per employee, raising our country’s disposable income and driving an employment driven recovery.  Employment led in terms of both rates and headcount.  We are not recommending hiring employees for the sake of it, but we should be intolerant of layoffs, especially when they are designed just to cut costs.  We have been closely watching the UK, where there has been significant shareholder activism and new regulation giving shareholders a say on executive pay.  Maybe here in Canada we can say that executives should have no bonuses in a year that even a single employee is let go.  And maybe large telecoms and cable companies that have enjoyed limited global competition and local duopolies should look in turn to commit to high levels of employment and higher than average wages as a responsibility to our country.   If all large employers in Canada committed to this, we could probably lead our country into growth with an improvement in Europe, the oil price or a USA presidential election?


We understand that a declining business needs to reduce costs to remain profitable, but with margins in the 30%-50%, it is not clear that these businesses are about to fail.  We also believe that there are other ways to reduce your costs, without mass layoffs.  Even if you need to reduce employee related costs in a business unit to make it profitable, employees leave, retire and change roles all the time.  This is part of the natural evolution of employment.  We are not suggesting jobs for life or union protection to include management, but mass-layoffs are destructive however we look at this.  There is lots of opportunity to innovate, offer new services, retire old businesses gracefully and move into new growth areas without destructive ill considered layoffs that do not actually create value.  We would like to appeal to the press, investors, analysts and pension funds who are the unwittingly encouraging companies to focus on the short term.   We should not invest more in a company that focuses on employee layoffs to improve already inflated margins, but rather those businesses that contribute to the overall growth of our employment, communities and indeed our economy.

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Wireless results summary – Canada – Q1 2012

Wireless results summary – Canada – Q1 2012

Well, now that all of the incumbents have reported, it is worth looking at how they did against each other.  Who won the quarter?  TELUS, followed by Bell with Rogers a distant third.  But that is just our opinion, it really depends how you measure.

The chart below is a summary of the last 5 quarters.  Although this is just a snap-shot and these metrics are not really equal in weight, these are the main metrics that the street and executives focus on in determining how they are doing compared with both the past and each other.

Rogers Bell TELUS key metrics summary

Key metrics summary

At first glance Rogers still rules the roost with 5/9 first places, but TELUS has started to win where it counts, Postpaid Nets, Churn, ARPU and EBITDA Margin.  We were pretty concerned when we saw that Rogers loaded 334K Gross Postpaid, but only grew their postpaid base by 47K subscribers.  Seems like a pretty uneconomical way of growing compared with TELUS who came in third with only 257 Postpaid Gross, but the highest postpaid nets at 63K.


So let’s look behind the superficial numbers to see what is going on and why the incumbents are going in different directions:


With more points of presence and no longer struggling for iPhone 4Ss, Rogers blew the lights out with 33k Gross Postpaid and 154K Gross Prepaid.  Rogers has more points of presence, probably close to 1,500 with third party, specialists, Wireless Wave, dealers and corporate stores.  TELUS on the other hand has few points of presence and does not benefit from wireless wave, which in our humble opinion is the best of the specialist channels.

Wireless Gross Share Bell Rogers TELUS Q1 2012

Wireless Gross Share Q1 2012 (Incumbents)


With a relatively modest gross numbers and high churn, both Rogers and Bell had negative nets.   We have tracked the incumbents quarterly since the beginning of 2005, but our data goes back more than another ten years and we have not seen negative nets for any incumbent let alone two.  This was admittedly driven by prepaid losses and Q1 has been net negative for the incumbents since 2007.  But with significantly smaller prepaid bases than postpaid, it is unusal to lose so many prepaid subs that it impacts your overall number.

wireless prepaid incumbent nets Q1

wireless prepaid incumbent nets Q1

Also the fighter brands of chatr, Koodo and Virgin have breathed new life into prepaid, so this certainly looks like a big win for the AWS new entrants.  Since Videotrons numbers were not crazy high at 22k nets, and WIND was much lower than expected at 12K nets, assuming that Mobilicity was also around 10K, this means that the total nets of the new entrants beat the total nets of the incumbents, albeit mainly on the back of significantly lower ARPU customers.

Incumbent wireless net share

Incumbent wireless net share


Postpaid nets were positive, but flat compared with last Q1 while the overall industry grew.  Note that Bell dropped from 81K in Q1 2011 to 63K in Q1 2012.   Rogers was flat year over year and TELUS grew by 11K in postpaid nets.  Some of this is by design, as it is dangerous to try to get Q1 volume by extending the Christmas discounts into Q1.  This should be a good quarter to keep your powder dry on COA and bank some EBITDA.

wireless postpaid nets share incumbents Q1 2012

wireless postpaid nets share incumbents Q1 2012



Churn was the divisive metric this quarter.   Rogers was ghastly – Blended churn moving from 1.71% a year ago to 1.83% and in the process moving from the best of the incumbents to worst churn in 5 quarters.   Bell was modestly better, improving from 1.9% to 1.84%, but some of this was driven by having so few prepaid subscribers left.  Bell’s postpaid churn also improved, from 1.4% to 1.35%, but since their base has grown, this still meant more actual postpaid subscriber churning, up from 219K in Q1 2011 to 231K this quarter.  TELUS enjoyed a marked improvement in churn, where blended churn came down from 1.7% to 1.55% year over year.

Wireless percentage churn Q1 2012

Wireless percentage churn Q1 2012

In postpaid absolute churners reduced from 220K (same as Bell) to 194K.  These are great churn numbers and we did not see a commensurate pickup in retention to achieve this – retention spend for TELUS was down 6% at $138m.

Churn numbers by volume

Churn numbers by volume


Smartphones continued in a phenomenal way, although we did hear some tempered comments on the conference calls, in particular, Rogers seemed to have slipped from ARPU of 2X non-smartphone to 1.9X and now to 1.8X.  At the same time the non-smartphone ARPU for Rogers has also been declining.   They suggested in the past that they expected cheaper smartphones that would reduce their requirement for the huge COA investment, but this has not happened.  What has happened is that lower end smartphones are unsurprisingly attracting lower end subscribers, who are more likely to be price sensitive, spend less and have a higher propensity to churn.   The smartphone share chart show the decline of Rogers and the rise of Bell and TELUS following from a level playing field in handsets and the significantly better network coverage and quality that the Bell/TELUS network partnership offers.



EOP was largely unchanged mainly because of the Bell and Rogers negative nets.  There were share changes though.   In EOP postpaid market share, Rogers dropped to the lowest (38.5%) since Q4 2005.  TELUS and Bell both gained share.

Postpaid total subscribers share

Postpaid total subscribers share


All three incumbents have had declining voice ARPU for some time.  This is partly due to re-price, which has been more relevant at Rogers, partly due to Smartphone LTOs resulting for a more competitive market, but also from a reduction in voice minutes.  The reduction is voice minutes is partly behavior changes – customers spending more time communicating via email, text, IM and so many other social media platforms, but also a change in demographics, where younger customers are more likely to have a high end smartphone, but can’t afford the high end voice plan.

blended ARPU wireless incumbents

Blended ARPU wireless incumbents


Rogers average price per minute dropped suddenly with the introduction of chatr.  Bell and TELUS have trended down, but not at the same rate.

The text-voice substitution is marked as the smartphone penetration rates increase, voice revenue declines.  Although we have not read anything about VoIP using the carriers networks, there are many solutions that offer this and the 3/4G networks are more than capable of offering high quality calls over the data network at a fraction of the price.  We expect significantly more pressure on voice in the foreseeable future.  TELUS had another quarter (6 consecutive quarters) of ARPU growth to $58.87.  Voice decreased 10%, but data grew 29% resulting in an overall growth of 1.7%.

WIND reported a 2.2% increase in ARPU, but at $27.30, this still significantly lower than where it should be in our opinion.  This is less than half the incumbent ARPU, which does not sound sustainable.

Revenue and EBITDA

Overall Incumbent service revenue grew nearly 4%, Rogers was down marginally, Bell was up 6% and TELUS up 7%.   But all were well below the average of over 7.5% year over year growth average from 2007-present.  There was an overall decline in hardware revenue of 9% based on lower handset sales, this is normal for Q1.

Incumbents share of industry EBITDA

Incumbents share of industry EBITDA


Bell and TELUS grew their EBITDA at 13%, while Rogers EBITDA declined 9%, giving an incumbent average of just of 3% in EBITDA growth.   EBITDA share for Rogers declined to 2006 levels.


We really thought Bell had a good quarter, until we saw the TELUS results.  TELUS seems to be operating at a level of detail that is absent from the others.   Rogers had a very poor quarter and the new entrants failed to capitalize on incumbent weaknesses in gross loading and churn.





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