{"id":6582,"date":"2013-08-12T17:09:20","date_gmt":"2013-08-12T21:09:20","guid":{"rendered":"http:\/\/mhgoldberg.com\/blog\/?p=6582"},"modified":"2022-01-23T08:48:45","modified_gmt":"2022-01-23T13:48:45","slug":"a-capital-intensive-business","status":"publish","type":"post","link":"https:\/\/mhgoldberg.com\/blog\/?p=6582","title":{"rendered":"A capital intensive business"},"content":{"rendered":"

There are some writers in the blogosphere who aim to defend Canadians from the telecom bogeymen<\/a>. Some of the most popular blog posts get retweeted regularly with endorsements from consumer groups and academics, spreading their influence further.<\/p>\n

A few of these writers have created the common misconception that Canada’s high average revenue per user<\/a> (ARPU) is evidence of high prices. That is not true, no matter how many times the lie is repeated. <\/p>\n

Today, we saw an attempt to dispel a claim that Canada’s wireless capital spending per capita is among the world’s highest.<\/p>\n

We have previously seen claims that Canadian carriers don’t spend that much on capital [see point 5 of this link<\/a>], using an argument like “if it was really that expensive to build and maintain those networks, Canadian carriers wouldn\u2019t be sitting near the top of the profit list.”<\/p>\n

So it wasn’t surprising that today, we saw a post called “Canadian wireless investment: nothing special<\/a>“.<\/p>\n

In it, the thesis apparently is that if the capital intensity of Canada’s wireless carriers is middle of the road, then “what they\u2019re actually spending is nothing special from an international perspective.” The conclusion is wrong, and not only because the arithmetic calculations underlying the blog post were flawed.<\/p>\n

When I first read the piece, my initial reaction expressed surprise that the author was promoting a metric that confirms Canadian wireless revenues are appropriate for the level of capital spending.<\/p>\n

After all, capital intensity is measured as capital spending divided by revenues. It is a ratio that aids certain kinds of financial analyses. If two companies have the same capital intensity, but one company has double the revenues per user, then mathematics says that this same company must have double the capital per user. Investors use capital intensity, together with other metrics, to compare past and possible future performance of the companies being analyzed.<\/p>\n

Canada’s wireless industry has among the world’s highest levels of revenue per user. It should therefore be expected, that if its capital intensity is comparable to other countries, then Canada’s capital spending per user is among the world’s highest. As it turns out, that is is true.<\/p>\n

The author wrote<\/a>:<\/p>\n

I sat down this past weekend and crunched the numbers from 71 of the biggest cellphone companies in the developed world, spanning 23 countries, and here\u2019s what I found: despite the talking point, Canada\u2019s wireless investment is in fact nothing special. It\u2019s actually thoroughly mediocre.<\/p><\/blockquote>\n

He should have spent more time looking at the numbers he crunched [his spreadsheet<\/a> – pdf]. The calculations are just plain incorrect. It appears that he may have inverted the ratio, and calculated revenue dollars per capital dollar spent. <\/p>\n

The inverted ratio can still be meaningful, but it effectively confirms that Canada’s industry revenues are not out of line when considering the level of capital investment being undertaken.<\/p>\n

But that clearly wasn’t what the author set out to do. <\/p>\n

He intended to provide a number that could be compared to what the carriers report quarterly. For example, the post says<\/a>:<\/p>\n

For example, according to Telus\u2019s 2012 annual report (links to PDF), wireless capital intensity was 12 per cent, up from 9 per cent the previous two years (the company does indeed typically spend more than its two rivals).<\/p><\/blockquote>\n

One would think that this quote would have made him pause when looking at the numbers he presented for 2012 in his calculations: TELUS 7%, Bell 8%, Rogers 5%. Wouldn’t you want to reconcile how TELUS reported 12% and your calculations show 7%?<\/p>\n

The correct calculations would still show Canada’s capital intensity being middle of the pack. Unfortunately, the writer doesn’t appear to understand that this calculation doesn’t disprove the claim that capital investment is exceptionally high; in fact it proves the point. That is basic mathematics. If the denominator is high but the result is average, it means the numerator must be high. <\/p>\n

It was disappointing to see academics and lobbyists re-tweet the “findings”, without pausing to think about what was actually being examined, or the validity of the test of hypothesis. There is a real imbalance in the information being presented. It was perhaps another missed teaching moment.<\/p>\n

One of the challenges in engaging with some industry commentators is the need to prepare for a nearly immediate volley of ad hominem<\/em> attacks. I have been called shill, lobbyist (as though this is a pejorative), sophist, propagandist, consultant. And that is just today’s collection.<\/p>\n

I am proud to acknowledge being a consultant, although I am not (nor have I been for a number of years) engaged by any parties involved in the current wireless policy debates. And although I am able to be found in Canada’s registry of lobbyists, I have not yet engaged in lobbying activities. My client is a smaller Canadian wireless services provider, with policy interests often at odds with the so-called Big Three. <\/p>\n

I write from the perspective of a Canadian with 33 years invested in launching competitive telecommunications services in Canada and the US. My views are mine. <\/p>\n

I welcome your comments and perspectives. Feel free to disagree with my views, but don’t call me names.<\/p>\n","protected":false},"excerpt":{"rendered":"

There are some writers in the blogosphere who aim to defend Canadians from the telecom bogeymen. Some of the most popular blog posts get retweeted regularly with endorsements from consumer groups and academics, spreading their influence further. A few of these writers have created the common misconception that Canada’s high average revenue per user (ARPU) …<\/p>\n

A capital intensive business<\/span> Read More »<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","two_page_speed":[],"footnotes":""},"categories":[1],"tags":[],"class_list":["post-6582","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"yoast_head":"\nA capital intensive business • Telecom Trends<\/title>\n<meta name=\"description\" content=\"There are some writers in the blogosphere who aim to defend Canadians from the telecom bogeymen. 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