The existence of only three big telecommunications companies in Canada has created an ongoing saga of monopolistic dominance. This power has accumulated to such a state that no other companies can challenge them. However, the Canadian Federal Government, the controller of Canadian airwaves, seeks to change this for the consumers' sake.
The current situation
The "Big Three," of Telus (TSX:T), Rogers (TSX:RCB), and Bell (TSX:BCE), have been able to charge premium rates for their services for over a decade. Together they have 25 million customers, which amounts to about 90% of the market. No other companies have been able to successfully enter the market largely due to expensive domestic roaming rates, the fact of having to purchase sections of the wireless spectrum from the government, and the strong competition in a mature market. This has left the Canadian consumer with few choices, and has sparked the government to intervene.
The graph below, with data provided by the Canadian Wireless Telecommunications Association, charts the decline of new subscribers to wireless companies. The decline means that it's becoming even harder to break into this maturing market with fewer new prospective customers and many contract bound users. It is a data set to consider carefully when assessing the potential nationwide competitor of Quebecor (TSX:QBR.B).
What is Quebecor?
Quebecor, like all major Canadian telecoms, is diversified into many communications forms and operates multiple subsidiaries. Based in Montreal, this company provides services mainly in Quebec, although there is a possibility of expansion. The subsidiary in question is Videotron, a media provider that makes most of its revenues from cable television.
The background information on the key names within Quebecor may surprise you. There is a definite political connection, both in provincial and federal arenas. Firstly is the controlling shareholder Pierre Karl Péladeau, a newly announced candidate for the Parti Quebecois in Quebec. His announcement led to him stepping off the company's board of directors, and may have caused harm to the company's image. Péladeau's ideology includes the idea of Quebec sovereignty, an unpopular idea with many Canadian consumers. Additionally, Brian Mulroney, former Prime Minister of the country, was recently appointed chairman of the board.
Quebecor has just acquired new blocks of the wireless spectrum, and is looking to acquire more from floundering players. Having recently picked up parts of the spectrum in other provinces, as far west as British Columbia, expansion looks to be imminent. Quebecor has spent $788 million on spectrum blocks. Money, according to the President and CEO Pierre Dion, is also planned to be spent on acquiring Wind Mobile or Mobilicity, two companies that lack funding but have precious stake in the market. This move, Dion says, could triple Quebecor's mobile customer base, but only if the government allows for the purchase.
Recent times have seen the Canadian government attempting to manipulate the telecom landscape with moves in favour of the littler players. With new regulations implemented into the market, the "Big Three" can now no longer buy out the little guys, like what has happened in the past. Also implemented is a regulation that reserves sections of the spectrum to be auctioned only to newcomers. All of this is to encourage competition across the nation.
However, despite the many regulations that have been announced, there is one more that is necessary for success. It involves domestic roaming rates. If adjusted, this would allow for Quebecor to piggyback off other carriers' networks for much less than what is currently the case, and would allow for an easier transition to a national scale of operations.
The current mentality of a "level playing field" held by the government at this time greatly favours a company like Quebecor. With new acquisitions of spaces within the spectrum, and the possibility of gaining more customers in Wind Mobile or Mobilicity, there is definite potential for great growth. However, one must consider the maturity of the market, and the lack of new customers as a result, before jumping to any big conclusions.
Affiliation with separatist politics creates a notable dynamic that could very well haunt this large-cap of French-Canada. The last thing a business wants to do is cause division within its consumers, something that could very well happen from direct involvement with political figures. There is also concern with regards to the instability of a four carrier system, and the great risk of expansion. Analyst Dvai Ghose of Canaccord Genuity predicts that expansion will cost in excess of $2 billion. And if the past can tell us anything about the future, we should be wary of a new telecom vying for prosperity
The bottom line
If further government involvement occurs, which is likely when considering its strong motivation for increased competition, then Quebecor is a company to have on the radar. Don't be too concerned at this point about any of the "Big Three," however, because of their combined dominance in many fields of communications.
Erik MacLennan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.