A Freedom Mobile billboard in Toronto on Feb. 3, 2017.Theresa Suzuki/The Globe and Mail
Dvai Ghose is the principal at Ghose Investment Corp. His clients include Telus Communications Inc. He is the former head of global research and strategic development for Canaccord Genuity Group.
Since 2008, successive Conservative and Liberal governments have tried to bring down the price of telecom services in Canada. Their methods: Favourable spectrum allocation for new entrant wireless carriers such as Videotron and Freedom Mobile and, more recently, resale mandates to help wireline and wireless resellers including TekSavvy and Freedom.
On the surface, this policy has been successful. According to Statistics Canada, wireless pricing in the country actually declined by 50 per cent between December, 2018, and December, 2023. More than half that drop occurred in just the past year.
The Globe and Mail has reported that Statscan’s data cover only advertised prices, not the potentially higher fees people actually pay on existing subscriptions. But the important context is that cellphone plans have become cheaper at a time when the prices of other household items have risen.
In 2023, inflation, as measured by the Consumer Price Index, was 3.9 per cent. Price growth for services was 4.6 per cent; for groceries, 7.8 per cent; and for rental accommodation, 6.5 per cent. Therefore, on average, wireless spending as a percentage of household income has declined significantly since 2022. A recent report commissioned by the federal Innovation Department and produced by Wall Communications Inc. also concluded that wireless is now cheaper in Canada than in the U.S.
In addition, while the quality of food purchased in the grocery store and rental accommodation has not improved as prices have gone up, telco quality and bandwidth has improved significantly as prices have decreased.
But the government’s fixation on lower telecommunications pricing has led to unfortunate unforeseen consequences. And these consequences will ultimately not just trickle down to consumers, but also ripple far and wide.
The impact of falling prices on Canadian telecom financials and stock prices has been remarkable. After decades of growth, driven by massive increases in data consumption, Canadian wireless average revenue per user, or ARPU, is now under pressure. Rogers reported a 1.2-per-cent year-over-year decline in the ARPU of last year’s fourth quarter; Quebecor’s absorption of Freedom drove a 7.1-per-cent decline, while Bell and Telus were flat.
Given that wireless and broadband in the country are fully penetrated, Canadian telcos are increasingly reliant on population growth for revenue growth. And the government’s decision to cap foreign student visas could curtail telecom growth further.
The stock market has clearly recognized this. Over the past three years, the S&P/TSX Composite is up 17 per cent. In contrast, Canadian telco stock prices (excluding Rogers, which has enjoyed the benefits of the Shaw merger) have declined on average by 8 per cent. Ironically, the shares of new entrant Quebecor are down in-line with peers, as the market is concerned by the continued lack of profitability at Freedom and increased broadband competition in Quebec.
While many consumers may celebrate declining wireless pricing and conclude that telecom challenges are not their concern, telecoms tend to cut investment, innovation and jobs when they face revenue and cash flow pressure. We have seen this in many parts of Europe and Israel, but also closer to home.
Bell Canada, for example, is guiding to between 0-per-cent and 4-per-cent revenue growth in 2024, and between a 3-per-cent and 11-per-cent decline in cash flow. The market is concerned that the paltry 3-per-cent increase in BCE Inc.’s dividend for 2024 may be the last we see for the foreseeable future.
Not surprisingly, Bell Canada has reacted by slashing 4,800 jobs, or 9 per cent of its work force, during a challenging economic backdrop; selling 45 radio stations; and cutting capital expenditures by more than $1-billion in 2024-25. According to the company, this is capital that would have been used to bring high-speed fibre internet to hundreds of thousands of additional homes and businesses in rural, suburban and urban communities.
While Telus may be better positioned because of its greater exposure to wireless, more advanced fibre builds and non-telecom assets, it eliminated 6,000 positions in August. The Globe has reported that more than 1,000 employees left Rogers as part of a voluntary departure program after the company’s takeover of Shaw.
Ironically the company that may be most exposed to wireless pricing pressure is Quebecor. Its wireless ARPU (including Freedom) in last year’s fourth quarter was only $36.29, down 7 per cent over a year earlier, compared with $58.71 for Bell, $58.50 for Telus and $57.96 for Rogers. Further ARPU pressure at Quebecor may lead to the market questioning if its Freedom Mobile strategy is financially sustainable.
Price declines of this pace and magnitude come with inevitable consequences, with potentially negative effects on the Canadian economy. Israel, which artificially drove lower pricing and competition through regulation, is now 64th in the world in terms of wireless bandwidth, with an average download speed of 40 mbps – less than half that of Canada. Regulators across Europe, which have done the same, are now crying for telecom consolidation and greater profitability to increase investments to improve ailing networks.
Let’s hope that Canada does not make the same mistakes.