Retail Internet prices could drop after CRTC cuts rates, analysts say
The federal telecom regulator’s decision to axe wholesale rates for high-speed Internet could hurt the bottom line for Canada’s largest providers, but ultimately result in lower prices and more choice for consumers, analysts say.
The Canadian Radio-television and Telecommunications Commission (CRTC) substantially lowered rates major providers can charge independent Internet service providers for wholesale access to their high-speed networks, calling their lack of respect for established costing methods “very disturbing” and their proposed rate hikes “unreasonable.”
Smaller competitors such as Distributel and TekSavvy are expected to eventually cut their prices to reflect lower costs for the amount of data used, sparking price competition that could put pressure on incumbents such as BCE Inc., Rogers Communications Inc. and Telus Corp., according to analysts.
That could spell trouble for large providers since Internet price increases have helped offset the erosion in cash from the shrinking number of home phone and TV subscribers, Desjardins Capital Markets analyst Maher Yaghi wrote in a note Friday.
“It is too early to quantify the impact, but we believe this decision could push incumbents to sell Internet flanker brands in order to compete against small players ... and, in the process, shift economic value from them to the consumer,” Yaghi wrote.
RBC Capital Markets analyst Drew McReynolds, who estimates Internet resellers have 15 per cent of the market in Canada, wrote to clients that the decision is “not a game changer, but visibility on wireline revenue growth gets tougher.”
If final wholesale prices — the CRTC’s decision only set interim rates and is expected to take a few more months to set final rates — favour resellers more than incumbents, McReynolds wrote wireline revenue growth could come under more pressure.
Rogers, one of seven incumbents who the CRTC rebuked for its high interim rates (Crown corporation SaskTel was the only provider whose rates weren’t revised), is disappointed with the CRTC decision.
“We are disappointed and do not agree with setting arbitrary rates. We believe in an evidence-based, fair balance that both covers the cost of building and maintaining Canada’s world-class networks and incents further investments to keep powering our digital economy,” media relations manager Andrew Garas said in a statement.
In Rogers’ case, the CRTC slashed its proposed monthly capacity rate per 100 Mbps by about 71 per cent to $319.68 from its suggested $1,122.
Not surprisingly, smaller competitors are excited by the lower rates.
“It really puts us on a much better footing to compete and deliver value,” said Matt Stein, CEO of Distributel and spokesman for the Canadian Network Operators Consortium.
Stein doesn’t expect savings to immediately trickle down to consumers, as he thinks most providers will be reluctant to change actual rates until the CRTC finalizes the rates.
That said, he expects the CRTC to continue on the same path considering the decision’s stern tone. And while incumbents lament the smaller margins, he noted smaller companies still pay cost plus markups.
“No one is getting a free ride here. The commission didn’t just throw at a dartboard,” he said. “One of the valuable things the independent providers bring is competition to the market. If that decreases prices, I don’t think that’s a bad thing.”