Co­geco foray into wire­less seen as ‘very dif­fi­cult’

An­a­lysts ques­tion like­li­hood of suc­cess amid com­pet­i­tive, reg­u­la­tory re­al­i­ties

Windsor Star - - FINANCIAL POST - EMILY JACK­SON Fi­nan­cial Post ejack­son@na­tion­al­post.com

Cana­di­ans greedy for more com­pe­ti­tion in the wire­less sec­tor wel­comed Co­geco Com­mu­ni­ca­tions Inc.’s rev­e­la­tion that the ca­ble com­pany is con­sid­er­ing a foray into the mo­bile busi­ness.

But an­a­lysts ques­tion whether the strat­egy to make Co­geco the fifth wire­less player in its op­er­at­ing mar­kets of On­tario and Que­bec will suc­ceed given the com­pet­i­tive and reg­u­la­tory re­al­i­ties of Canada’s wire­less mar­ket.

While wire­less bills re­main higher in provinces with less com­pe­ti­tion, prices re­cently fell sharply in Ot­tawa where five providers op­er­ate (the Big Three, Shaw Com­mu­ni­ca­tions Inc.’s Free­dom Mo­bile and Que­becor Inc.’s Videotron), Des­jardins an­a­lyst Ma­her Yaghi noted in a Fri­day re­port. “Hence, we be­lieve it would be very dif­fi­cult for Co­geco to re­al­ize prof­its from a wire­less ven­ture,” Yaghi wrote, though he added that a wire­less of­fer­ing could help Co­geco re­tain in­ter­net, tele­vi­sion and tele­phone cus­tomers on the wired side of its busi­ness.

On a call with an­a­lysts this week, chief ex­ec­u­tive Louis Audet pointed to con­sumer frus­tra­tion with high wire­less prices and in­creas­ing syn­er­gies between wired and wire­less net­works as a rea­son for en­ter­ing the sec­tor. Co­geco stock jumped nine per cent on the news on Thurs­day, tak­ing its year-to­date gains to 17 per cent. It was up less than a per cent on Fri­day, clos­ing at $71.53.

De­spite the syn­er­gies, Yaghi ques­tioned whether a push for lower prices makes it an at­trac­tive time to en­ter the mar­ket. “We are un­sure that neg­a­tive pres­sure on av­er­age rev­enue per user growth from the pub­lic ac­tu­ally cre­ates a bet­ter en­vi­ron­ment for a new wire­less en­trant,” he wrote.

In May and June, Co­geco bought ad­di­tional spectrum, the air­waves nec­es­sary to op­er­ate wire­less net­works. This week, it said wire­less was its third in­vest­ment pri­or­ity af­ter ex­pand­ing its U.S. op­er­a­tions through ac­qui­si­tions and in­vest­ing in ex­ist­ing ca­ble net­works. It said it would likely pur­sue a “hy­brid” model where it owns some wire­less in­fra­struc­ture and part­ner with an­other op­er­a­tor for the rest. Es­sen­tially, it would func­tion in part as a mo­bile vir­tual net­work op­er­a­tor (MVNO) that sells ser­vices on some­one else’s net­work. De­spite a call from the fed­eral govern­ment to look into their vi­a­bil­ity, MVNOs are not man­dated in Canada. As such, few ex­ist since in­cum­bent wire­less oper­a­tors tend to be re­luc­tant to sell whole­sale ac­cess to their fa­cil­i­ties af­ter spend­ing bil­lions on their net­works. Barclays an­a­lyst Phillip Huang noted to clients Fri­day that Co­geco would need to find a part­ner with scale, cap­i­tal and ex­per­tise to help it build a net­work. Even with a part­ner, he noted that Co­geco is still much smaller than ex­ist­ing play­ers Shaw and Videotron, serves smaller mar­kets and has less spectrum.

“We cur­rently do not see suf­fi­ciently com­pelling rea­sons for ei­ther Shaw or Videotron to di­lute their wire­less growth op­por­tu­nity and part­ner with Co­geco on even mod­estly favourable terms,” Huang wrote.

He ques­tioned whether Co­geco’s com­ments that it may par­tic­i­pate in the auc­tion for 600 MHz spectrum — high value fre­quen­cies needed for next gen­er­a­tion mo­bile ser­vices — is a tac­tic to ne­go­ti­ate an MVNO agree­ment with Shaw or Que­becor, both of which want to buy more spectrum. De­spite the chal­lenges with a hy­brid strat­egy, Huang be­lieves the move to­ward wire­less is the right move.

“We have long writ­ten that Co­geco’s fu­ture in Canada would be dis­ad­van­taged with­out wire­less, and so we ap­plaud man­age­ment’s ef­forts to ex­plore op­tions to en­ter wire­less.”

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