Wednesday, February 14, 2007


Is the mobile marketplace working?

Pronunciation: "ä-li-'gä-p&-lE, "O-
a condition in which a few sellers dominate a particular market to the detriment of competition by others

You'll find that a lot of people use the term oligopoly in reference to the Canadian mobile market. They point to wide price differentials between Canadian and US mobile calling plans; seeming indifference from the carriers; disciplined pricing; reduction in competition due to mergers; etc.

However, last week's disappointing wireless results from Bell may be signalling that the unregulated, free marketplace is actually working, managed by the power of consumer choice.

A report last week from RBC Capital Markets includes a section called Bell Mobility Rate Increases Help Profitability But May Be Going Too Far. In it, RBC CM says:
Bell’s $2/month SAF increase to postpaid plans was frequently noted in our discussions with independent retailers and contributed to the slowdown in subscriber growth this quarter, in our view. ...

While the rate increase should narrow the ARPU gap with its peers and improve EBITDA flow-through ..., we nevertheless believe that Bell’s pricing increase by way of the SAF may be a hindrance to future growth as:
  1. neither Rogers nor TELUS plan to match the increase, which leaves Bell at a potential disadvantage as the SAF is one of the few billable items that is directly comparable across rate plans;
  2. with rising penetration we believe there is less scope for such obvious rate increases (Rogers and TELUS achieved higher ARPU through stimulating usage and data services – not by having premium prices); and
  3. with ongoing regulatory examination, frequent media reports comparing Canada’s higher prices vs. the U.S., and a potential spectrum auction approaching in the next 12 months, rate increases may help to skew public sentiment against the industry.
In other words, RBC CM and the financial community wasn't any happier about the SAF increase than anybody buying mobile phone service.

Net adds were down because potential new customers shopped elsewhere - signs that the competitive marketplace may be able to discipline itself. While existing customers had little choice - for now - watch what happens at renewal time.

We'll be looking at churn as contracts come due in the next quarter. Wireless number portability is coming in one month.

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Your argument that the results of Bell’s recent increase of its mobile system access fees suggest that the unregulated, free marketplace is working and, as a result, the wireless market may not be as much of an oligopoly as “a lot of people” contend is really a stretch especially when you look at the definition of ‘oligopoly’ you used in yesterday’s blog entry.

Even with the negative impacts experienced by Bell, there are still really only a very few players in the Canadian wireless market and there dominance in the market is still a barrier to competition by other players. In Ontario and eastward, Bell and Rogers dominate, Telus has a minor share and all the resellers have an even smaller part of the market. In Manitoba and westward, you have the same situation except that Telus replaces Bell as Rogers’ major competitor and Bell becomes the company in third place.
So, there is still a few dominate sellers dominating the market, which precludes competition, just as there was before Bell raised their mobile system access fees.

While such facts as Rogers making almost 50 cents in EBITDA for every dollar in revenue in its third quarter, and Canadian wireless carriers receive almost twice as much revenue for every minute of airtime as U.S. providers do, and Canadians not seeing the cut throat tactics like aggressive discounting and the in-store gift giveaways of things like DVD players, credits and discounts that characterized the 2005 holiday period in 2006 do not necessarily mean the wireless market is an oligopoly in the context of your definition, they don’t point to a truly open and competitive market either.

What really suggests (maybe even proves) that the Canadian wireless market is an oligopoly is a comparison of some of the offerings in 2002 with today’s offerings. In 2002, evening rates used to start at 6pm, now they start at 9pm. In 2002 calls were billed by the second, now they are now billed by the minute. And, in 2002, there were “free” handsets, now we have $50 handsets with 3-year contracts attached.

So, my friend, I’m sorry I have to disagree with you, but I don’t think you can say that the Canadian wireless market has suddenly become ‘free and competitive’ just because Bell lost a few customers due to their selfish and oligopolistic behaviour.
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