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Telecom and Media Trends in Canada

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Telecom has traditionally been seen as a utility-like business – however the reality is that telcos have to invest continuously so that customers can have the latest in 5G and fibre optic internet. The space is always changing and so are the trends in the industry.

Media has changed rapidly too – from every town having a newspaper with several prominent national broadsheets or newspapers of record to the shutting down or consolidation of small print media as everyone ends up reading increasingly global websites, the most high quality of which are setting up paywalls (WSJ, Financial Times).

Given the recent Shaw-Viawest divestiture and the cessation of print publication for the National Post, we felt it was a good time to write about telco and media trends before they become stale.

Verizon, the Fourth Carrier (Now Shaw)

In 2013, the incumbent telco stocks had a huge scare which resulted in a steep drop for TELUS, BCE and Rogers (Shaw was still primarily a cableco at this point) because of noise that Verizon was going to enter the market as a 4th major carrier. Unlike upstarts in WIND and Public Mobile, Verizon had the scale and know-how to operate a successful telecommunications company and ostensibly had the backing of the then-Harper Government who supported more competition.

The rumors worried the Canadian telcos enough that a mass campaign highlighting the unfairness of a foreign carrier entering without having paid for certain infrastructure was jointly commissioned. This was not a good public relations exercise and received negative feedback from consumers who did not like the pricing power of their phone providers. Credit agencies jumped on the sentiment and warned that any large foreign carrier entering the market would be a credit negative.

In time, Verizon dismissed the idea that entering the Canadian market was seriously considered – and the reason is obvious – there is a lack of return. The main reason why there are only 4 major providers in Canada is because Canada is the second largest country in the world by land mass with an extremely low population density which is concentrated in urban areas along a small strip close to the US border. This requires large infrastructure build while the market size is relatively small.

A Verizon or AT&T entering the Canadian market would accordingly need to build up a large operation while grabbing market share through a price war (a fear for the domestic telcos was that AT&T and Verizon had far more liquidity and pockets to outlast them in a price war). For this to be justified, there would need to be some other catalyst (large scale population growth or demand for data) that did not exist – and AT&T were better served saving cash for higher growth markets with less competition or using cash in return of capital initiatives for their shareholders (dividends, repurchases).

Shaw has now positioned itself to be a 4th carrier, which is more feasible than the US telco narrative due to infrastructure already in place and knowledge of the market.

Rising Rates and Telco Stocks

A big theme in telecom stocks is the increase in interest rates. Investors view telecom stocks like utilities due to their steady cash flow nature and consistent dividend payouts. They are in some way fixed-income like, so rising interest rates make telecom stocks relatively less attractive as investors can get a risk-free yield more cheaply. The potential divergence in interest rates in the US and Canada may result in a difference in telecom stock values (US rates are poised to rise while Canadian rates are expected to be unchanged as the economy grows more slowly) – however, given that most Canadian telecom stocks are dual listed, results may be diluted.

Capital Expenditures in the Telecommunications Industry

Capital expenditures for growth are a staple of the telcos, as the industry requires technology that innovates rapidly and faces strong risk of obsolescence. Technology has grown exponentially to a point where what was a want (a cell phone) is now a need and imperative in conducting business and day-to-day affairs. Telcos have unwittingly become the main conduit for selling mobile computers (your smartphone).

A lot of this capex is in US dollars instead of Canadian as the technologies are often global. Canada is not a hotbed for this wireless innovation, but although perennial leaders from the US such as Cisco and Qualcomm continue to offer solutions, a lot of the technology is actually from new Eastern firms such as ZTE Corporation and Huawei who have domestic pressure to provide service to ultra-densely populated cities who are experiencing unprecedented growth.

The Globalization of Content and the Death of Ads

In the 90’s before the internet, Canadians thought that certain Canadian musicians and certain Canadian shows were more popular globally than they really were – radio and television had minimum Canadian content requirements. Today, the government’s power to restrict global sources of entertainment and media has waned, as consumers flock to YouTube or Soundcloud for music and will choose to watch TV via signal from their computer, usually an international show with superior talent and production values such as Game of Thrones.

This has made the CBC’s losses steepen and led to a decline in original Canadian content, as there is always a better global alternative. The pockets where Canadian media can still win revolve around preferences unique to the Canadian market (Sportsnet and TSN coverage of hockey) and localized news (Business News Network).

With declining TV viewership and new options to skip commercials, the price of advertising in traditional wireline products has been challenged – the profit associated with this traditional advertising is now either embedded in monthly fees or has disappeared altogether as the content is a loss leader for something else. Advertising itself has become stronger than ever as outreach has evolved to different mediums such as Facebook or Snapchat.

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ex investment banking associate

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