Will Freedom be the game changer in wireless market?

Shaw may be set to ramp up momentum with bigger, cheaper plans, new iPhones

Freedom Mobile’s potential to grab customers from the Big Three incumbents has analysts proceeding with more caution in Canada’s wireless market in 2018.

Shaw Communications Inc.’s wireless play is expected to gain momentum in the new year after its “Big Gig” plans with 10 gigabytes of data for only $50 triggered retaliation from its larger competitors, which responded in December with limited time offers of 10 GB for $60 on their higher quality networks. Consumers rushed to get the unprecedented deals from Rogers Communications Inc., BCE Inc. and Telus Corp.

“We believe Freedom’s momentum is set to accelerate,” Barclays analyst Phillip Huang wrote Monday.

Huang expects Shaw’s progress will be driven by its larger, cheaper data plans and its launch of the new iPhone model at $0 down — a departure from standard industry practice — and its network enhancements that allow it to sell iPhones in the first place.

These actions, however, are expected to put pressure on margins as Shaw spends more to deliver growth, especially if Shaw faces retaliation from the Big Three, Huang noted.

While some investors may support the aggressive strategy, others may be concerned about sacrifices to Shaw’s cash position, he added.

Shaw’s Freedom remained a small player at the end of 2017, capturing less than four per cent of the country’s wireless market share with about 1.1 million subscriptions out of 30.7 million nationwide. Still, it injected competition into B.C., Alberta and Ontario where it sparked year-end promotions.

Freedom is expected to add 150,000 to 155,000 wireless customers in 2018, according to analysts’ consensus estimates, a small wedge in a market expected to add one million customers overall, Canaccord Genuity analyst Aravinda Galappatthige wrote in an industry update Monday.

Canaccord sees Telus as the top pick for 2018 given its strength in wireless and likely gains as Shaw shifts its focus to profitability. It expects a “close call” between Rogers and Bell, with Rogers having a slight advantage given its recent dominant wireless performance even though it lost a federal government contract to Bell.

There’s still a strong case for a pro-wireless stance since the big three carriers’ subscriber growth, customer churn rates and earnings growth remain “outstanding,” Galappatthige wrote. Plus, indications are there will be a “sizable” beat for subscriber additions for the fourth quarter of 2017.

“Having said that, we would slightly colour our position on wireless with the cautionary note that in light of the more aggressive offerings from Freedom Mobile,” he wrote. “While our view is that Freedom is currently not in a position to compromise the healthy fundamentals being enjoyed by the incumbents, some watchfulness is required.”

There could be negative implications for the incumbents if they continue to match Freedom’s lower pricing for longer periods, especially when it comes to average revenue per user, he wrote.

TD Securities analyst Vince Valentini named increasing disruption from Freedom as one of the top telecom trends to watch in 2018, given its improved network and ability to sell iPhones. Other themes included the battle between cable companies and telcos for television subscribers and Rogers’ wireless growth.

Indeed, Desjardins analyst Maher Yaghi upgraded Rogers to buy in a research note on Monday. It added the most wireless subscribers in the first nine months of 2017 (282,000 additions compared to 258,000 for Telus, 242,000 for Bell and 103,000 for Freedom), he noted, while maintaining strong margins.

Rogers stock has dropped about 10 per cent since its peak in November, which Yaghi believes is a reaction to Freedom.

“Freedom’s potentially negative impact on the Canadian wireless industry is undeniable, but we believe the timing of this impact could be later than the market currently expects,” Yaghi wrote.

He doesn’t expect Freedom to make a dent until 2019 or late 2018, given Shaw’s network is still at a disadvantage.

Shaw reports its quarterly results for the period ending Nov. 30 on Thursday. It didn’t start selling iPhones until Nov. 24 and only launched its “Big Gig” plans on Nov. 22, so analysts don’t expect to see a large impact from its competitive plays until its next round of results.