How Investment Rules Shape Canada's Communications Market

No set of government regulations, no matter the intent, always and everywhere have impact strictly confined to the problem the rules are meant to address. In fact, the unplanned and unexpected consequences can work to undermine the "solutions" the rules are supposed to achieve. 

Like many other countries, Canada has foreign investment rules that prohibit non-Canadian firms from owning a majority of shares of leading communications service providers. In Canada's case the rule is that no foreign entity can own more than 33.3 percent of voting shares in a dominant Canadian telco. 

On the other hand, foreign firms can own up to 100 percent of Canadian service providers with market share of 10 percent or less. 

Some Canadian telcos now think the rules are unfair. The rules, for example, can allow much-larger foreign telcos to get a foothold in the Canadian market by investing in smaller firms. On the other hand, the foreign ownership rules also mean that the large Canadian providers are not able to attract the same level of investment as the smaller firms. 

Rogers, Telus and BCE, for example, think the foreign ownership rules should be relaxed, so that every Canadian communications service provider operates under the same rules. 

At least by implication, such regulatory relaxation might also mean that restrictions on the amount of spectrum an incumbent can own, or bid for, could change. Already, some might argue, smaller upstarts could bring huge resources to bear in spectrum auctions, when their foreign parents have deep pockets. 

Oddly enough, rules designed to protect Canadian service providers might be having the opposite effect. 

FCC Acts to Ease Deployment of Temporary and Small Cells

The Federal Communications Commission says it plans to streamline procedures related to deployment of temporary cell sites, and will this year also act to clear administrative barriers to building small cell sites and distributed antenna systems as well.

The FCC wants to expedite the placement of "temporary cell towers" such as "Cells on Wheels" (COWs) that can be used during special events, or possibly emergencies.

The FCC also says it will act to expedite the deployment of small cells and distributed antenna systems. 

In the communications business, we sometimes forget that regulatory and legislative bodies enable, or can bar, creation of communications businesses. Financing, entrepreneurial skill and technology also are necessary, as well as clear value for end users. But it all begins with government permission to use spectrum, or to allow entities to enter a market.

Younger observers sometimes forget that it once was illegal for any company but one, in any area, to provide telecommunications services, for example. That barrier became more porous in the 1980s and then became virtually fully open to competition in 1996. 

Still, lots of administrative procedures can raise the cost, and lengthen the time to bring new facilities or services to market, and the FCC wants to reduce some of those obstacles. 

U.K. LTE Auctions Begins

The U.K. auction of spectrum intended to support new Long Term Evolution networks in that country have formally begun. 

And observers expect a bifurcated strategy to emerge, with the leading national mobile service providers, including Vodafone, O2 , Three and EE, largely competing for the 800-MHz frequencies most suitable to national coverage, even in less dense areas.


On the other hand, three potential new providers, including  BT, PCCW and MLL, are expected to bid for the higher frequencies more suitable for denser areas and cities. 

The primary issue of coverage suggests the current national providers want to replicate their 3G coverage when adding LTE. 

The new providers presumably will favor business plans that include wholesale, such as selling LTE capacity to other carriers in heavy-traffic areas, enterprise and business services. In other words, the 2.6-GHz frequencies will lead to building of networks whose primary value is "capacity," not "coverage."

The spectrum will almost double the frequencies available for U.K. mobile broadband  services. 

"Broadband for Everyone" is Not Just a Slogan

Some might think the phrase “broadband for everyone” is only a slogan. On the contrary, over the next decade or so, we might find an extraordinary jump in the percentage of human beings in developing regions who have access to the Internet, can afford to buy access on a regular basis, and therefore create a big business opportunity for suppliers.

For example, if one assumes that in 2005 the middle class population of China was about eight percent, by 2030 it will be as high as 72 percent. In India, where the percentage of middle class people in 2005 was perhaps in the low single digits, by 2030 some 41 percent of India’s people will be middle class, defined as households with annual disposal income between 200,000 rupees up to one million rupees ($3,606 to $18,031 in annual disposable income).

Over the last decade, there has been a 50 percent jump in the number of people in the “middle class in Latin America and the Caribbean, The World Bank reports. Roughly speaking, about 30 percent of people in the Latin American and Caribbean region were middle class in 2009, using a definition of income between $10 a day and $50 a day.

The report on the Latin American middle class  found that the middle class in the region grew to an estimated 152 million in 2009, compared to 103 million in 2003, an increase of 50 percent.

Among the highest achievers were Brazil, which comprised about 40 percent of the region’s middle class growth; Colombia, where 54 percent of people improved their economic status between 1992 and 2008; and Mexico, which had 17 percent of its population join the middle class between 2000 and 2010.

Today, the middle class and the poor in Latin America account for roughly the same share of the population, according to the report.

For suppliers of broadband services, the report is significant for several reasons. First, it shows dramatic growth of the base of consumers who logically will be buyers of Internet access services and products.

The study also suggests an important income threshold of about $10 a day income, the level at which enough economic security has been reached that the household is unlikely to fall back into poverty. That likely has key psychological implications for spending on products such as broadband access.

By a rough rule of thumb that suggests demand for broadband becomes significant once monthly cost falls to about three percent of household income, that $10 a day standard suggests a broadband service (terrestrial) will reach start to reach high levels of adoption at about $9 a month prices, and majority adoption at about $8 a month.

The point, as Canadian hockey star Wayne Gretzky once said, was to “skate to where the puck is going to be.” Even though the player with his stick on the puck mostly has to pay attention to where the puck is, right now, other defensive and offensive players will be thinking ahead to where the puck will be.

Suppliers of broadband access have the same challenge, namely building a business today, for today’s customer, while building towards a future where many billions of people will be able to become customers.

Will U.K. LTE Auctions “Pick Winners and Losers?”

It is of course axiomatic that without access to spectrum, no entity can be in the mobile service provider business. That access can be through owned or leased spectrum, but fundamentally, spectrum access is necessary. That naturally raises the question of whether “winning” fourth generation Long Term Evolution spectrum is “necessary” for a firm to be a market leader in mobile services, in the future.

Some might say so. “The importance of this spectrum auction in shaping the future of the U.K. wireless market cannot be understated,” said Daniel Gleeson, mobile analyst at IHS iSuppli. “Access to spectrum is the main barrier to entry for any company looking to build a new wireless network.”

It is true that seven companies are bidding for spectrum: the country’s four existing mobile operators along with three new players. With only three companies likely to win spectrum, at least one of the United Kingdom’s existing operators is likely to lose out,” said Gleeson.

The four existing players that have entered the auction are EE, O2, Vodafone and Three. The three new entrants are BT, PCCW and MLL Telecom.

Other European spectrum auctions have only seen a maximum of three operators win 800 MHz spectrum. The United Kingdom could follow this pattern, yielding three winners and four losers, IHS iSuppli says.

Among the existing mobile operators, the companies with the most to lose are O2 and Vodafone, which presently do not have 4G spectrum, IHS iSuppli said.

Not securing 800 MHz licenses would be a disaster for O2 or Vodafone, some might argue, even if both firms were to win spectrum at 2.6 GHz. The reason is that 800 MHz is viewed as essential for rural coverage, while the 2.6 GHz spectrum is seen as best suited to urban coverage.

Some might argue that the more likely outcome is that the fourth provider will wind up leasing spectrum from one of the other three providers, so the result might not be catastrophic. Still, owning spectrum arguably is safer than leasing spectrum.

But that analysis assumes the prices paid by the winners are reasonable, in light of the incremental revenue opportunities. Europe’s mobile service providers know well the dangers of overpaying for spectrum, as was the case when the 3G auctions were hold.

Operators overpaid for that spectrum, causing years of financial distress that also threatened  bankruptcy for a few.

So it is possible the U.K. 4G auctions could rearrange business plans, perhaps in unexpected ways. Depending on the outcome, one or two of the leading four providers in the U.K. mobile market might find themselves more limited in terms of national coverage.

One or more of the “winners” might find themselves in more favorable positions, in terms of quality and quantity of spectrum. The auction, by itself, will not immediately change the market share situation. But it could begin a process that does change the market.

Safaricom, Intel Introduce Yolo, Smart Phone for Cost Conscious Kenya Consumers

Safaricom Limited has launched the "Yolo" smart phone, touted as the first smart phone for Africa.

The Yolo is the third model with  Intel branding . 

Yolo is powered by the Intel Atom Z2420 processor (1.2GHz. It also comes with a 3.5-inch touch screen, a 5-megapixel camera with full HD video capture support, FM radio and HSPA+ support.

"We're redefining what cost-conscious Kenyans can expect from a smartphone," said Peter Arina, general manager, Safaricom' s Consumer Business Unit.

The device is aimed at the growing number of cost-conscious and first-time buyers in Kenya who do not want to sacrifice device performance or user experience for cost, Intel says.


The Yolo smartphone will be sold in Safaricom shops countrywide at the entry price of Kshs. 10,999 (about US $125) and comes bundled with a free 500 MBytes of data.

In some ways, the surprise here is the Intel brand being associated with a smart phone, in something other than an "Intel Inside" sense. That might not be so unusual in the future, as any number of mobile service providers might want their own branded phones, in some cases to better integrate with a carrier's own software and applications. 

Smart Phone Market Shifting to Developing Nations, says Samsung

All markets saturate at some point. And the smart phone market might be closer to that point than most believe. In fact, Samsung, in reporting its latest fourth quarter 2012 earnings, already is warning that sales of smart phones will slow in 2013. 

That might be important, as Apple and Samsung represent the two profitable suppliers of smart phones. By most reckoning, all the other smart phone suppliers earn only a little, or lose money. 

"The furious growth spurt seen in the global smart phone market last year is expected to be pacified by intensifying price competition compounded by a slew of new products," Samsung said. In other words, expect slower growth in 2013. To be sure, one might argue that Samsung is talking here about its own prospects.

Growth in the overall market might continue. In fact, that is what Samsung seems to expect. 

"In the first quarter, demand for smart phones in developed countries is expected to decelerate, while their emerging counterparts will see their markets escalate with the introduction of more affordable smart phones and a bigger appetite for tablet PCs throughout the year," Samsung says. 

In other words, the smart phone market is approaching saturation in the developed markets, lower-cost devices will be needed to drive growth in emerging markets, while consumer spending might shift from smart phones to tablets. 

Aside from what a slowing smart phone market might mean for suppliers of smart phones, the big strategic issue for mobile service providers is replacement revenue sources, once smart phone driven data plan sales level off. 

Growth drivers have shifted, over the last couple of decades. For cable operators, it was video, then shifted to broadband access, then to voice, and now to business customer revenues. For fixed network operators growth shifted from voice to broadband to video entertainment. 

For mobile operators, growth shifted from "more customers" (subscriber units)  to messaging plans, to data revenues for Internet access. The coming saturation of the data plan growth driver is the looming strategic issue for mobile service providers. 

With U.S. smart phone penetration above 55 percent, saturation effects will start to show every step of the way to about 80 percent, when growth will really become difficult. That is one reason why some are skeptical about whether Microsoft, Research in Motion and Nokia can hold or establish a sustainable foothold in the market. 

By some reckoning, we are getting late in the game for major market share changes.