The Contour News Review
December, 2002
Fido no greyhound in cellphone race
Everybody likes to root for the underdog, but when it comes to Microcell Telecommunications and its canine-branded Fido service, consumers should be wary of where they place their bets. Of the four players who compete in the Canadian wireless market, Microcell is falling seriously behind the pack. Fido, in fact, has lost its bite, and the limping creature it now is seems to be buying time.
Microcell announced last week it would need to let go 6 per cent of its workforce, or 149 employees, to conserve cash — something the company is short of these days. It has suspended key projects. It has about $2 billion in long-term debt, but not enough earnings to pay for interest on that debt and the capital expenditures it needs to maintain and upgrade its wireless network.
Microcell's cap-ex has fallen steeply relative to its three larger peers, whose networks cover 50 per cent more of the population than the Fido network. Microcell has no plans, or any financial capability, of expanding its network.
To make matters worse, two executives from minority owner T-Mobile USA resigned from Microcell's board of directors last week. Deutsche Telekom AG of Germany is the owner of T-Mobile, formerly called Voice Stream. It holds 15 per cent of Microcell and was once thought to be the U.S. white knight that would assure Fido's tail kept wagging. Those hopes have faded.
The company's stock is trading for pennies. It's signing up far fewer customers and many existing customers are deciding to bail. Microcell is the only company in the Canadian wireless industry to argue for local number portability, which allows customers to join a different wireless provider without losing their phone number.
Ironically, local number portability may be the only thing now dissuading Fido customers from leaving Microcell and joining Rogers, Telus or Bell. Microcell has more than 1.1 million Fido subscribers. That's nothing to sneeze at. But it takes more than a large customer base to sustain a company. Being a successful wireless service provider is all about sustaining growth and this means investing to improve networks, services and phone offerings. The wireless industry is all about momentum, and momentum is something Microcell does not have.
That's why it's painful seeing all the Fido advertisements on TV, in newspapers and on billboards this holiday season. Heck, Microcell doesn't have the bucks for marketing — but it really has no choice. Deciding not to advertise in the wireless industry, particularly during the biggest financial quarter of the year, would be like pulling the plug on a life-sustaining respirator.
So how did little Fido lose its way in the wireless fog?
Dvai Ghose, a telecom analyst with CIBC World Markets, says there were a number of mistakes Microcell made early on that are having an impact today. First, Ghose says the company embraced a business model that was more appropriate in a European context where the coverage area is considerably smaller, populations are denser and the need to subsidize handsets is minimal.
European carriers have a little more flexibility with pricing and the types of customers they take on because their capital expenditures and handset subsidies aren't as high as in Canada.
This partially explains why the company made a conscious decision to limit the footprint of its wireless network. It thought it could do more with less, but as Ghose explains, "When it comes to mobility, the key is to be able to use it ubiquitously. If you don't have that, it's really tough."
Another decision based on the European model was Microcell's choice of the GSM wireless standard. GSM, which stands for global system for mobile communications, is the most popular digital wireless standard in the world and, no surprise, the standard in Europe as well.
GSM is also a great technology, but its popularity in North America was less certain when Microcell selected it in the mid-1990s. At the time, CDMA — code division multiple access — was the standard in the United States.
Microcell was the first to choose its standard when it picked GSM. Bell and Telus chose CDMA shortly after. Clearnet, says Ghose, did the smart thing and chose CDMA only after everyone else had picked. By doing so, Clearnet kept open the possibility of eventually being acquired by Bell or Telus. As we now know, Telus did end up purchasing Clearnet in the largest telecommunications acquisition in Canadian history. But without a larger company in Canada using the GSM standard, Microcell had no such options, and with foreign-ownership rules in place, an outright acquisition by a U.S. or European wireless company continues to be out of the question.
With no larger parent company lining Microcell's pockets, it is the industry orphan. Rogers Wireless now uses GSM for its mobile phone service, but having a network that reaches more than 90 per cent of the population, Rogers has no need for Microcell's inferior network.
Microcell chose the European way, not the North American way. It decided, like many of the European firms, to create a business unit dedicated to wireless wholesale. That failed, because, again, handset subsidies in Canada are too high for wireless resellers to make any money. Microcell's advertising also has a European flair, and while it might work fine in Quebec, it often bombed in the rest of Canada. Personally, I've always found Microcell's marketing and advertising to be culturally awkward. The dog thing wears off after a while, and most of the time, the ads just aren't funny.
It's all a shame. Microcell, at its core, is a good company run by good people. But I wonder if it really understood the Canadian market. Today, most analysts and industry observers are convinced that Microcell's days are numbered. The company is trying to restructure its debt and is searching for new sources of capital.
Many wonder, however, whether the downward spiral can be reversed. Sure, the company can buy some time, but it's doubtful it will survive as the same company. And don't think that lifting foreign-ownership restrictions will save the day. As Bill Linton, CEO of Call-Net Enterprises recently told me: "The state of the industry is such that Martians wouldn't invest in us right now." Perhaps Canada is destined to have just three major wireless players. Whether this is a good or bad thing depends on where you stand.
If you're a shareholder of BCE, Telus or Rogers, that may be a good thing. But for Microcell's employees and customers, the next few months will be filled with anxiety. Don't let the happy Fido ads fool you. This company's tail is not wagging.
December, 2002
Fido no greyhound in cellphone race
Everybody likes to root for the underdog, but when it comes to Microcell Telecommunications and its canine-branded Fido service, consumers should be wary of where they place their bets. Of the four players who compete in the Canadian wireless market, Microcell is falling seriously behind the pack. Fido, in fact, has lost its bite, and the limping creature it now is seems to be buying time.
Microcell announced last week it would need to let go 6 per cent of its workforce, or 149 employees, to conserve cash — something the company is short of these days. It has suspended key projects. It has about $2 billion in long-term debt, but not enough earnings to pay for interest on that debt and the capital expenditures it needs to maintain and upgrade its wireless network.
Microcell's cap-ex has fallen steeply relative to its three larger peers, whose networks cover 50 per cent more of the population than the Fido network. Microcell has no plans, or any financial capability, of expanding its network.
To make matters worse, two executives from minority owner T-Mobile USA resigned from Microcell's board of directors last week. Deutsche Telekom AG of Germany is the owner of T-Mobile, formerly called Voice Stream. It holds 15 per cent of Microcell and was once thought to be the U.S. white knight that would assure Fido's tail kept wagging. Those hopes have faded.
The company's stock is trading for pennies. It's signing up far fewer customers and many existing customers are deciding to bail. Microcell is the only company in the Canadian wireless industry to argue for local number portability, which allows customers to join a different wireless provider without losing their phone number.
Ironically, local number portability may be the only thing now dissuading Fido customers from leaving Microcell and joining Rogers, Telus or Bell. Microcell has more than 1.1 million Fido subscribers. That's nothing to sneeze at. But it takes more than a large customer base to sustain a company. Being a successful wireless service provider is all about sustaining growth and this means investing to improve networks, services and phone offerings. The wireless industry is all about momentum, and momentum is something Microcell does not have.
That's why it's painful seeing all the Fido advertisements on TV, in newspapers and on billboards this holiday season. Heck, Microcell doesn't have the bucks for marketing — but it really has no choice. Deciding not to advertise in the wireless industry, particularly during the biggest financial quarter of the year, would be like pulling the plug on a life-sustaining respirator.
So how did little Fido lose its way in the wireless fog?
Dvai Ghose, a telecom analyst with CIBC World Markets, says there were a number of mistakes Microcell made early on that are having an impact today. First, Ghose says the company embraced a business model that was more appropriate in a European context where the coverage area is considerably smaller, populations are denser and the need to subsidize handsets is minimal.
European carriers have a little more flexibility with pricing and the types of customers they take on because their capital expenditures and handset subsidies aren't as high as in Canada.
This partially explains why the company made a conscious decision to limit the footprint of its wireless network. It thought it could do more with less, but as Ghose explains, "When it comes to mobility, the key is to be able to use it ubiquitously. If you don't have that, it's really tough."
Another decision based on the European model was Microcell's choice of the GSM wireless standard. GSM, which stands for global system for mobile communications, is the most popular digital wireless standard in the world and, no surprise, the standard in Europe as well.
GSM is also a great technology, but its popularity in North America was less certain when Microcell selected it in the mid-1990s. At the time, CDMA — code division multiple access — was the standard in the United States.
Microcell was the first to choose its standard when it picked GSM. Bell and Telus chose CDMA shortly after. Clearnet, says Ghose, did the smart thing and chose CDMA only after everyone else had picked. By doing so, Clearnet kept open the possibility of eventually being acquired by Bell or Telus. As we now know, Telus did end up purchasing Clearnet in the largest telecommunications acquisition in Canadian history. But without a larger company in Canada using the GSM standard, Microcell had no such options, and with foreign-ownership rules in place, an outright acquisition by a U.S. or European wireless company continues to be out of the question.
With no larger parent company lining Microcell's pockets, it is the industry orphan. Rogers Wireless now uses GSM for its mobile phone service, but having a network that reaches more than 90 per cent of the population, Rogers has no need for Microcell's inferior network.
Microcell chose the European way, not the North American way. It decided, like many of the European firms, to create a business unit dedicated to wireless wholesale. That failed, because, again, handset subsidies in Canada are too high for wireless resellers to make any money. Microcell's advertising also has a European flair, and while it might work fine in Quebec, it often bombed in the rest of Canada. Personally, I've always found Microcell's marketing and advertising to be culturally awkward. The dog thing wears off after a while, and most of the time, the ads just aren't funny.
It's all a shame. Microcell, at its core, is a good company run by good people. But I wonder if it really understood the Canadian market. Today, most analysts and industry observers are convinced that Microcell's days are numbered. The company is trying to restructure its debt and is searching for new sources of capital.
Many wonder, however, whether the downward spiral can be reversed. Sure, the company can buy some time, but it's doubtful it will survive as the same company. And don't think that lifting foreign-ownership restrictions will save the day. As Bill Linton, CEO of Call-Net Enterprises recently told me: "The state of the industry is such that Martians wouldn't invest in us right now." Perhaps Canada is destined to have just three major wireless players. Whether this is a good or bad thing depends on where you stand.
If you're a shareholder of BCE, Telus or Rogers, that may be a good thing. But for Microcell's employees and customers, the next few months will be filled with anxiety. Don't let the happy Fido ads fool you. This company's tail is not wagging.