What if Telus had bought Fido?

By Peter Nowak

It seemed innocuous at the time, but Rogers Communications Inc.'s last-minute steal of the Fido wireless brand from Telus Corp. in 2004 may be a key reason why Canada is the cellphone backwater that it is.

The deal could also be a factor for why the government is now getting involved in an industry that has been largely free of regulation since its inception more than two decades ago.

Applications for entry into an auction of wireless airwaves, which begins on May 25, are due March 10. New entrants are being given preference by the government, with 40 per cent of the spectrum the fundamental asset needed to operate a cellphone business on sale reserved for them and unavailable to the nation's big three providers, Rogers, Telus and Bell Canada Inc.

In unveiling the auction plan in November, Minister of Industry Jim Prentice cited a lack of competition between existing operators that has resulted in high prices, lagging services and low usage.

The rules of the auction should net new regional and possibly even national cellphone providers and thus more competition, lower prices, better services and increased uptake, Prentice said.

But would the special enticement of spectrum have been necessary if the 2004 sale of Microcell Telecommunications Inc., operator of the Fido brand, had gone differently?

One thing is for sure, industry analysts say the market would have been very different if Telus had bought the company rather than Rogers.

"Telus would be smiling from ear to ear. It was the right thing to do," says Iain Grant, president of telecommunications consultancy The SeaBoard Group. "Rogers' results would probably be far less stellar than they are now."

Montreal-based Microcell began life as a publicly traded company in 1997 and had by 2004 accumulated about 1.2 million customers across Canada. The company had also racked up big debt as it strived to shake up the market by undercutting the other carriers' prices.

Microcell's financial woes made it a target for the big three, who were eager to take out the aggressive upstart that was stealing their business and causing prices to drop.

Vancouver-based Telus, in May 2004, made a $1.1-billion bid for Microcell a premium of more than 30 per cent to what the company's shares were trading at. As late as August of that year, Telus chief financial officer Robert McFarlane told investors no other bids had emerged for Microcell and he was confident the deal would go through.

Toronto-based Rogers, however, entered the fray in September and trumped Telus with a $1.4-billion bid. Microcell shareholders accepted Rogers' offer, the company was sold and Canada went from four national cellphone providers to three. The Competition Bureau approved the purchase, arguing it was better than the alternative, which was to allow Microcell to go broke.

With the addition of Microcell's customers to its own 3.9 million, Rogers became the country's largest cellphone provider, with 5.1 million subscribers. Bell, in comparison, had 4.5 million at the time, while Telus had 3.6 million.

Purchase gave Rogers a monopoly

The purchase did more than decrease the number of cellphone providers consumers had to choose from it also gave Rogers a monopoly over the Global System for Mobile (GSM) wireless standard in Canada.

GSM was at the time emerging as the de facto global cellphone standard and beginning to relegate the rival Code Division Multiple Access (CDMA) format, which in Canada is used by Bell and Telus, to obsolescence.

Today, more than 80 per cent of the cellphone providers in the world use GSM, with CDMA popular primarily among North American carriers.

That dominance has given GSM operators numerous advantages over their CDMA counterparts.

Handset makers tend to release CDMA versions of their phones months after the GSM versions, if at all. GSM carriers inevitably benefit from the "cool" factor Apple has not made a CDMA version of its hot-selling iPhone, for example. The phone is not yet officially available in Canada, but as it stands, Rogers is the only provider capable of offering it.

There are also volume benefits for the cellphone provider in that the more handsets it buys from the manufacturer, the cheaper they are. With some manufacturers, including Nokia Corp. the world's largest not even making CDMA phones anymore, the prices on those handsets are getting higher. Telus chief executive officer Darren Entwistle last year complained that his firm pays about $30 to $40 more per handset as a result.

Also, since there is a dearth of compatible cellphone networks in most of Europe and Asia, CDMA devices don't work there, which has made GSM the phones of choice for people who travel those areas particularly business users. CDMA operators in North America have had to invest in costlier dual-mode phones that work on both types of networks, or watch business users flock to their GSM rivals.

The same is true in reverse Rogers is the sole reaper of roaming revenue from GSM-using foreigners using their cellphones in Canada.

The company has enjoyed all these advantages and has, since its purchase of Microcell, been cleaning the clocks of Bell and Telus. In 2007 alone, Rogers added 651,000 new wireless subscribers for a total of 7.3 million, bringing in $5.5 billion in revenue. Telus, in comparison, added 432,000 subscribers in 2007 for a total of 5.5 million and $4.2 billion in revenue. Bell, meanwhile, added 272,000 subscribers last year for a total of 6.2 million and $4.1 billion in revenue.

Bell and Telus under pressure to convert

Both Bell and Telus are under pressure to convert to GSM, or at least build an "overlay" that would allow for the offering of both technologies. Telus is under particular pressure to do so before the 2010 Vancouver Olympics, when the world will descend on its doorstep. As it stands, Rogers will earn all that roaming revenue and, adding further insult, is the fact the Bell is the official telecommunications sponsor of the Games.

Still, a GSM rollout would be costly to Telus. Estimates have pegged an overlay would cost somewhere between $350 million and $500 million spread over a few years, and would take close to a year to cover major cities.

Purchasing Microcell would have given Telus a significant entry into the GSM market and would have greatly altered the balance of the Canadian market, analysts say. Telus would have had a much greater presence in central Canada and it would have had a much wider customer base in that the Fido brand has typically been aimed at price-conscious consumers.

More importantly, competition would likely have been greater. One further benefit of GSM phones, which use a removable Subscriber Identity Module (SIM) chip that contains a user's address books and personal data, is that they have helped lower prices in many European and Asian nations. Consumers there can buy one GSM phone and switch providers simply by acquiring a new SIM card without having to buy an entirely new device.

In Canada, where users need a new phone whenever switching carriers, a different system has developed providers have locked customers into long-term contracts in exchange for discounts on devices.

GSM phones in Canada as well as in the United States are also locked to further prevent customers from switching providers by inserting a new SIM card, a practice that is illegal in some European and Asian countries.

Customers in Europe and Asia thus pay up front for their phones and are free to frequently switch providers, which has led to more competition and lower prices on service plans a dynamic that simply has not developed in Canada, but could have if there were more than one GSM carrier.

Profits wouldn't be as high

If Telus were competing with Rogers for the same customers, their bottom lines might not be as impressive because of lower prices.

"You would have seen the benefits of the competition and you would have seen a slightly smaller profit margin for both firms," says Darren Meister, associate professor of information systems at London's University of Western Ontario.

A Telus spokesman declined to comment.

Some analysts, however, believe the Canadian market is plagued by inertia and wouldn't have changed much had the sale of Microcell gone differently. The lower prices and better services offered in the United States, where about 80 per cent of the population have cellphones as opposed to 60 per cent in Canada, likely still wouldn't have materialized.

"My gut still tells me that requires the injection of more competition through a new player or players," says Lawrence Surtees, principal analyst of communications research for consultancy firm IDC Canada. "Would either [Rogers or Telus] really want to upset the apple cart? As entrenched players, probably not."

Canada was also late in adopting number portability, where customers can take their phone number with them when switching providers. The Canadian Radio-television and Telecommunications Commission only forced the change a year ago, well behind many other developed countries. Having to change cellphone numbers was a big impediment for many customers to switch providers, analysts say.

Nevertheless, Surtees says both Telus and Bell will soon be forced to make a decision on what to do with CDMA as new players emerging from the spectrum auction are likely to deploy their own networks over the next two years. Those providers are almost certain to choose GSM, or its successor, the Long Term Evolution standard.

In the meantime, SeaBoard's Grant says Telus and Canada, by extension is "stuck with the date it brought to the ball."