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Why new subscribers are vital to Canada’s wireless industry
TORONTO New immigrants, a strong economy, millennials who abandon home phones for wireless plans, hand-me-down mobile devices for younger kids, the rise of second smartphones exclusively for work.
Telecom executives rattle off these reasons whenever asked to explain the seemingly unstoppable growth in Canada’s wireless market, which has added new subscribers every quarter since the end of 2015.
Investors tend to focus on subscriber retention rates and how much cash each customer spends on their monthly wireless bill, but as average customer spending increases more slowly, sheer volume is becoming a more critical part of the game for telecom players.
In the first half of 2018, the five largest carriers — Rogers Communications Inc., BCE Inc., Telus Corp., Shaw Communications Inc.’s Freedom Mobile and Quebecor Inc.’s Videotron — collectively added 745,476 wireless subscribers, up 39.7 per cent from 533,460 in the same period last year. (These figures include Shaw ’s results even though it reports from December through May.)
Yet average revenue per user (ARPU) growth fell to about 2.1 per cent in the second quarter based on a weighted average, Desjardins analyst Maher Yaghi noted to clients. That’s down from an industry average of around three per cent per quarter for the past two years, according to a report by Scotiabank analyst Jeff Fan.
“Average billings per user is declining despite continued strength in subscriber additions, which in our view indicates that competition has increased in the Canadian wireless market,” Yaghi noted to clients.
If each customer is spending less — bigger data buckets have become more common in the largest provinces since Freedom sparked a brief promotional war during the 2017 holiday shopping season — the number of new subscriptions matters more.
“In a moderating (average revenue per user) environment where we do well on lifetime revenue given our churn, we look for growth by market expansion,” Telus chief executive Darren Entwistle said in a quarterly call with analysts in August.
Entwistle and his competitors expect that expansion to continue since Canada has relatively fewer wireless subscribers for its population compared to its other Western countries.
Canada’s wireless penetration rate is about 87 per cent, or 31.5 million subscriptions based on the 2016 census population of 36.3 million, which gives it the lowest mobile broadband penetration rate in the G7, according to the Organization for Economic Co-operation and Development. Japan, Finland and Estonia have the highest penetration rates at more than 130 per cent.
Wireless penetration in the United States is about 120 per cent, with more than 400 million connections for a population of 325 million. Executives believe Canada can match the U.S. rate, which would mean an additional 12 million subscriptions for companies to fight over.
One thing in telecom companies’ favour is that new subscriber growth takes time and consumers are increasingly switching to smartphones, most of which are tethered to data plans.
In 2012, 80 per cent of Canadians had a cellphone, with 51 per cent owning a smartphone, according to a 2016 Media Technology Monitor report. The overall cellphone rate inched up to 87 per cent by 2016, with almost 90 per cent of those devices being smartphones.
“The volume component is still a big opportunity for us given the (penetration) rate comments and the fact that within this digital society and digital economy, a single human being frequently now has a multiplicity of revenue-generating devices,” Entwistle said.
Rogers chief executive Joe Natale expressed the same sentiments on his quarterly call with analysts in July.
“There is really no reason, no structural reason why we shouldn’t be at U.S. levels of penetration,” Natale said. “In the fullness of time, we will advance that from 87 to 120 as an industry, and it will happen over the course of the next few years.”
One obvious source of new customers is immigration, since Canada annually accepts about 300,000 new immigrants.
But there are other growth avenues. Natale pointed to an increased reliance on wireless, particularly among younger people who join the workforce and set up wireless-only households. The phenomenon of secondary phones, common in the U.S., is also starting to take root in Canada, Natale said.
Statistics Canada’s household spending survey captures the shift to cellphones from land lines. Nearly one fifth of the 88 per cent of households that reported having at least one mobile subscription in 2016 had three or more mobile devices. The number of households with a land line fell to 67 per cent in 2016 from 84 per cent in 2012.
Another reason for growth in mobile could be an increase in low-cost plans. Desjardins’ Yaghi noted to clients that wireless is now likely reaching demographics that have smaller disposable incomes. Of course, this trend could potentially affect the growth in billings, he added.
Scotiabank’s Fan, who credits the industry’s volume growth to increases in the penetration rate, population and the number of devices per consumer, described the number of new subscribers as “very healthy,” but cautioned that volume isn’t everything.
“We believe lifetime value per subscriber is the biggest driver of valuation and valuation per subscriber,” he said.
Lifetime value is less sensitive to subscriber additions than it is to churn — the rate of customers ditching a service, usually for another one — and average revenue per user, Fan noted.
In the latest quarter, the Big Three all reported higher churn rates and indicated they don’t expect revenue growth to re-accelerate, he added.
“Even with higher adds, we do not believe the conditions support higher valuation multiples for the wireless industry as a whole,” Fan said.
Still, wireless will remain the driver of telecom growth over the next five years, according to industry analyst IDC Canada’s market study released in August.
“The burgeoning popularity of wireless, coupled with a growing mobile workforce and increasing wireless substitution, strengthens the primacy of wireless as the preferred method of communications and the engine of telecom revenue growth in Canada,” study author Lawrence Surtees said in a statement.
IDC’s predictions for wireless penetration, however, are less bullish than the telecoms. It predicted the number of wireless subscribers will grow to 34 million by 2022, an 89-per-cent penetration rate based on the estimated population.
IDC acknowledged the wireless sector outperformed expectations in 2017, but stated that adding new subscribers will be less important than adding new services and applications.
“This will particularly be the case when 5G networks begin to come on stream at the end of the forecast period,” the researcher found.
Next-generation 5G networks are also expected to pave the way for technologies such as smart homes and self-driving cars. Executives are already planning for the day when a single household has dozens of connected devices in need of wireless subscriptions. As data becomes cheaper, every new subscription will count that much more.