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Sep 10, 2021

Don't hang up on the telecoms

Have you ever wondered why Canada’s telecom rates seem so much higher than other countries? It makes sense when you consider that Canada is a vast country with relatively small pockets of population density. Because of this, our higher populated and more profitable areas are used to subsidize the more remote areas of the networks to provide coast-to-coast coverage.

Gil Lamothe has been responsible for managing Canadian dividend stocks for two years at CWB Wealth Management. He previously headed two dividend funds for Industrial Alliance for 20 years. One of them outperformed the S&P/TSX 60 for 11 out of 16 years, between 2003 and 2018.
  • Relying on the "big 3" for 5G
  • Decisions made by the CRTC
  • What a telecom merger could mean


It wasn’t so long ago that, for the average person, telecommunications required picking up a non-portable handset and manually entering a phone number one digit at a time. Long distance was a scary word that meant, “Speak quickly, the meter is running!” Today, we carry our “handset” with us at all times and though we occasionally still use voice communications, much of our telecom use involves data. Whether in the form of text, email or video, long distance is now ubiquitous and connecting internationally in an instant is the expected norm.


In terms of telecom structures, Canada’s is somewhat outside the norm and it’s left many to wonder why our telecom fees seem so out of synch with other nations. There’s actually a simple reason for it. Canada is a vast country, with relatively small pockets of population density. This makes it particularly challenging from a telecom company’s perspective.


Providing connections, whether wire line or wireless, throughout the country is extremely costly, with low population centers generally being unprofitable. Given this, the working model to provide Canada-wide coverage is for the more populated and profitable areas to subsidize the more remote, less populated parts of the network. This is one of the main reasons why, relative to the rest of the world, Canadians pay more for their telecom services. 


Relying on the big 3 

There are three main companies that dominate the telecom services industry in Canada: Bell Canada (BCE), Rogers Communications, and Telus. Between the three, they’ve constructed and own most of the telecom network across the country. In recent years, as consumers have become more aware of the higher rates they’re being charged, there’s been political pressure to encourage competition within the industry, with the hope that rates would be reduced. 


As a result, Canada’s telecoms industry regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), has implemented several strategies to promote smaller providers entering the sector. This has cast somewhat of a shadow over the sector from an investment perspective, as the incumbents must share their networks with competitors and, in effect, subsidize the smaller providers. 


The latest industry development is the introduction of 5G technology. 5G will give customers faster download speeds, low latency (minimal delays), as well as greater capacity and connectivity with technology such as autonomous vehicles, industrial automation and traffic management.


The modern world demands this level of speed, volume and data transfer. Building 5G networks will require both a large investment in network technologies, as well as the purchase, via federal government auction, of the necessary wireless spectrum over which to transmit the data. 


The country is essentially relying on the big 3 for the investment in this buildout. In that context, we can see why having policies that artificially reduce the earnings power of telecom networks would be counter to the desire to promote the investment into building new 5G capability. As for the spectrum auction, the government is the beneficiary of the sale, which we now know has netted close to $9 billion in the most recent auction alone. It was largely forecasted to raise closer to $3 billion. 


The CRTC’s 2 big moves 

With this in mind, two recent decisions made by the CRTC, in relation to the telcos, becomes clearer. A ruling around the sharing of wireless infrastructure with smaller, mobile virtual network operators (MVNOs) leaves it to the two parties to negotiate a fee based on local roaming rates, rather than having the fee mandated. 


The big positive from this ruling is that the MVNO must become a facilities-based operator, (e.g., own physical infrastructure, or plan to build it, in the areas of their customers) in order to gain access to the incumbent’s network. This will significantly reduce the chance of MVNOs operating in Canada. 


Another ruling regarding the sharing of internet network access to smaller resellers allows the incumbents to charge higher sharing fees, essentially overturning a 2019 decision. These decisions reduce the weight of regulated competition which has overhung the larger telcos in Canada for several years now. We believe these recent regulatory decisions to be strong positives for the sector. 


Potential industry consolidation 

Another recent development is the proposed acquisition of Shaw Communications by Rogers Communications. This merger would reduce the number of second-tier telcos, which is ringing the anti-competition alarm bells.


It’s unlikely that Shaw would have had the financial resources to compete effectively in the 5G spectrum auction and related infrastructure buildout. The merger with Rogers would, in fact, result in a meaningful 5G competitor to both BCE and Telus going forward, particularly as BCE and Telus have a cross-Canada wireless network sharing agreement. 


As Rogers shareholders, we’re still awaiting the regulatory decision on the nature of this proposed acquisition but are hopeful that it succeeds, whether in whole or in part. 


Looking forward 

The telecommunications landscape in Canada is changing. With the move forward in 5G technology, the easing of regulatory hurdles, and the proposed acquisition of Shaw Communications by Rogers, the sector looks much different today than it did one year ago. We feel that these are positive developments for investors, and though there’s much capital spending yet to come, our sense is that the big 3 telcos (BCE, Telus and Rogers) are on strong footing going forward.



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