Canada’s wireless sector is going to be disrupted like never before. A new, formidable competitor has appeared in the horizon. America’s largest mobile network operator Verizon is now entering the Canadian market. With this entry, the dominance and profits of Canada’s three wireless giants: Telus, BCE Inc. and Rogers Communications Inc. will be threatened.
This move to enter Canadian market is the result of a new rule of the Ottawa Conservative government that allows foreigners to acquire telcos with less than 10 per cent market share. This is to bring new competition into the Canadian wireless sector. Verizon proposes to buy up small and struggling wireless companies like Wind Mobile and Mobilicity. If these deals come through then it would mark one of the biggest shifts Canadian telecom has seen in decades.
The small start-up companies like Wind Mobile and Mobilicity exist only because of government intervention and they had been unsuccessful in competing with these three wireless giants. Verizon is all set to become a powerful competitor with a strong capital, intensive branding and operational excellence.
One of the biggest reason for Verizon to become interested in Canada is because the US market has reached a saturation point. There is 100 per cent cellphone adoption in US while in Canada it is only about 80 per cent which means there is scope for more growth. Verizon is aiming to be a player, not just a passive investor. It already has a $700-million preliminary to buy Wind Mobile and an opening bid in an upcoming wireless spectrum.
Despite having only about 1/10th of the population of the USA, there are several factors that make Canada a valuable market for Verizon. One of the main reasons is the lack of partners. By investing in Canada, Verizon can own 100 percent of the operation and the profit would go entirely to them and need not be distributed to partners. This is not possible in USA where Vodafone has 45% stake in Verizon Wireless, US Cellular owns 5.5% of Verizon’s operations in Los Angeles and several third parties own parts of its network. This lack of full ownership means that Verzion has to distribute its cashflow to these partners.
Once Verzion is established in Canada, the profits could be used directly, thus reducing the need to take dividends out of its current Verizon Wireless subsidiary. By reducing dividends from Verizon wireless, Verizon can put pressure on Vodafone and potentially allow Verizon to purchase the minority stake in Verizon Wireless for a better price.