With the entry of new wireless players into the Canadian market approaching, UBS analyst Phillips Huang continues to feel the financial impact on incumbents will be manageable. He also thinks this factor is already reflected in their stock prices.
The analyst anticipates that new entrants will focus on lower-end, less profitable subscribers – at least in the near term. However, he told clients that the erosion of residential line use will accelerate as unlimited wireless voice plans are introduced. This could amount to annual line erosion of 4% for BCE Inc. (NYSE:BCE) and 3% for Telus Corp. (NYSE:TU) in two to three years, the analyst said.
Mr. Huang believes Quebecor Inc.’s (OTC:QBCAF) Videotron and Shaw Communications Inc. (NYSE:SJR) are in position to launch sustainable wireless businesses. For Quebecor, he expects this business to be EBITDA/cash flow accretive by 2011 or 2012. For Shaw, he thinks the company has shifted its long-term strategy from discount to premium wireless services.
As for the new entants, Mr. Huang does not think they are doomed to fail, but nonetheless face many challenges.
“Their negotiations with incumbents are still far from complete, and further funding is required to fully realize their current plans,” he said. “We also expect subscriber churn to prevent the premium market in the near term.”
The analyst sees Public Mobile, with its unlimited plans representing a differentiated offering, as the first new entrant to launch service. It is on track to operate in Toronto and Montreal by the end of 2009 and will gain 6% market share in its footprint in five years, he added.
Mr. Huang expects Rogers Communications Inc. (NYSE:RCI) to remain the leader in wireless due to its high quality network and ability to offset pressure on wireless voice with data growth.
He also suggested consolidation in the Canadian wireless industry is inevitable for the long term. While Globalive and DAVE are the most eager to seek partners these days, the analyst said the need for more spectrum may push Shaw to eventually acquire new entrants. He added that Public Mobile has strategic value to incumbents in the long term, particularly Telus.