Deregulation’s sales job

The Canadian government’s recent decision to soon deregulate local phone prices is being sold as a good thing for consumers and for providers.

The government – namely Industry Minister Maxime Bernier – is a big believer in market forces and hopes more flexibility given to carriers will result in lower prices for consumers.

The reality, consumers will soon find, is quite different. Consumers are going to soon find out they’ll be faced with the same or slightly higher local phone service prices once the Canadian Radio-television and Telecommunications Commission (CRTC) approves the applications for deregulation late this summer as expected.

That’s when the Bell, Telus and the other incumbent providers will be able to set their own prices in most urban markets across the country.

The result, much to the dismay of consumers, won’t be a price war. There are several reasons why a battle won’t break out.

Bell Canada and Telus are both former monopoly landline providers and are still heavily dependent on local phone service revenue – they won’t sacrifice a major source of revenue and profitability when given a choice. Furthermore, the incumbents don’t need or want to do anything radical.

Canada’s service providers have had ample opportunity and reason to start a pricing bloodbath, yet they have largely held the line on wireline prices. In recent years, the providers have lost hundreds of thousands of customers to cable telephony competitors.

Take Bell, for example. Videotron now has stolen roughly 449,000 landline customers – mostly in the Montreal area, which is Bell’s home turf. Bell even killed an all-you-can-dial $5-a-month long distance plan – an area where providers have cut prices for years.

Meanwhile in Ontario, Rogers has quietly accumulated a cable telephony subscriber base of about 440,000 customers.

Why not go after the lost customers, especially if they still provide a disproportionate amount of revenue? It’s because the wireline providers don’t have to drive prices down. The country’s cable TV service providers have introduced premium-priced digital telephone service in recent years (with the exception of Videotron).

The customers that have left the fold of the incumbents would have left anyways – they just needed directions to the door.

Instead of trying to win back the departed consumers, the telephone giants have focused on growth of services other than the home phone to compensate for landline subscriber losses.

Telus’ wireless unit (and increasingly its Central Canadian division) delivers the bulk of the company’s growth. Rather than sacrifice profit margins, MTS Allstream, the incumbent in Manitoba, has made up for some of its home phone subscriber losses by stealing TV customers away from Shaw Communications. The company now claims a 27 per cent TV market share in its home province.

Bell Canada also has a bigger problem on its hands now. The country’s largest communications services provider is embroiled in takeover talks that may or may not result in an outright acquisition of the company as early as this summer. The last thing the beleaguered Bell needs is a price war to further complicate matters.

If so-called “pure play” providers, like Primus Canada and Vonage Canada with their low-cost and feature-laden VoIP services for consumers, start to take large swaths of market share away from the likes of Bell and Telus, perhaps the incumbents’ approach to pricing will change. That’s not a scenario we’re likely to see in the near future, if ever, as the providers don’t have the financial wherewithal to take on the largest providers in head-to-head battles.

To be sure, there will be selective discounting by telcos that have lost a disproportionate amount of share in a region or city, perhaps Montreal.

Consumers looking for substantial discounts will likely have to take the local phone service as part of a bundle heretofore not a possibililty.

Luckily for consumers, a separate decision issued last month by Industry Canada ensured price caps on basic local services are been kept in place even in cities where local phone service regulations have been lifted, so the providers will be somewhat limited in their ability to raise prices. The providers can increase prices for features like voice mail associated with the local phone service.

Meanwhile, enjoy your summer. Just don’t expect the providers to give you more money with which you can fund your leisurely activities.

Kevin Restivo is an analyst with Seaboard Group

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