Tuesday, July 8, 2008

Globalive Set to Enter Canadian Wireless Market - It's the Network, Stupid!

I'm not following the AWS auction blow-by-blow, but it's pretty clear at this point that Globalive is set to emerge as the big winner - so to speak. The federal government stands to earn a huge windfall - over $4 billion - for auctioning off the spectrum licenses - and I have no idea what they're going to do with all this loot.

Anyhow, once the dust settles, it looks like Canada will get a few new regional wireless operators, such as Shaw in the West, Videotron in Quebec and Bragg in the Maritimes. I don't think the market can support much more than that, as Manitoba and Saskatchewan already have local wireless operators of their own.

Aside from Globalive, there's one other bidder who will have quasi-national coverage - DAVE- Data, Audio Visual Enterprises. It's a venture between John Bitove (satellite radio) and Microsoft co-founder Paul Allen. To me, they're a real wild card since they don't have any operating experience in this space, and it's a new, unproven venture.

So, that leaves us with Globalive, which is a pretty interesting company. They are poised to come out of this with spectrum to cover all of Canada except Quebec, which about as close as anyone is going to get up here. For sake of transparency, I will say that I have done work on and off for Globalive, but nothing connected to wireless, so there's no hidden agenda here.

I can't think of anything like Globalive up here, but telecom is definitely their business. For a variety of reasons, they are well positioned - and financed - for becoming a wireless player, and that's what matters. If you want to delve more into the details, you'll get some of it from their website, but today's wireless story in the Globe & Mail is a better place to get yourself up to speed.

For a variety of other reasons, I've also been skeptical that the Canadian market can support another national provider. We used to have four players, and now we're down to three. The costs of entry, of course are huge, and it's hard to see how anyone can hang in long enough to recoup their investment for spectrum and network buildout. Sure, wireless penetration is on the low side here compared to other developed country, and margins remain high. However, by the time new players come to market - which could be as long as two years - we'll pretty much all be mobile users, so the new business is going to have to come at someone else's expense.

So, why on earth would anybody want to do this? As the title of this post says --- it's the network, stupid. Here's what I think. I really can't see how anybody can make money long term up here being a new entry by just providing service in the mobile space. There just aren't enough subscribers to go around. However...

There are a few factors that make Globalive's situation unique, and may give them enough of an edge that will make this viable. Consider the following:

- They're building a network from scratch, and yes, this will be very costly. However, they'll be building it for today's market, which is all about video and data - not voice. It's a bit like fiber vs. DSL. Presumably, Globalive will be building a network around the applications that make money and sell smartphones. As good as the existing wireless networks are in Canada, they were not built this way, and will likely have to do some upgrading to keep pace once Globalive comes to market. The way I see it, whenever they are ready, Globalive should have the most advanced network, which should give them a nice window to capture their first round of subscribers.

- Globalive's backers have a LOT of experience with large scale mobile operations on an international scale. That means they have experience with spectrum auctions and they must have leverage with vendors that Canadian operators probably don't have - such as Alcatel-Lucent. In other words, they will likely be able to build their network cheaper than other new entrants, which will mean a faster payback on their investment. Because they have so much global expertise, they may very well be able to partner with major vendors and get financing or preferable terms. In other words, they may not have to lay out so much money, which would put them in a very good position to enter the market. Oh - and by extension, the same goes for handset vendors, which means they should be very competitive against the other operators in terms of both device selection and pricing.

- Globalive already has an established telecom operator in its stable - Yak. So there is some brand presence already, and ramping this up into a mobile carrier would really be a matter of scale.

- They also have several other telecom companies in their stable, so there's a built-in pool from which to draw for both talent and developers. Because they'll be coming to market with a state of the art network, Globalive will have a clean slate to truly become a 2.0 type of provider. This is not really a made-in-Canada business model, and Globalive brings an international mindset which I think will give them an edge for bringing innovative services to market. I'd be very surprised to see them simply copying what the incumbents are offering.

- Last but not least, as I say in the title of this post - it's the network, stupid. I'm thinking differently now about Globalive, and believe it's the network that's going to make them successful - not the services. We all know why the Vonages of the world are doomed - it's almost impossible to make a go when you don't have the network. Aside from all the advantages discussed already, another factor in Globalive's favor is that networks are cheaper to build today than in the cellular world. This is still the biggest barrier to entry, but it's not as high as it used to be, and Globalive has deep pockets. Once you get past that hurdle, you will be on an equal playing field with the incumbents. At that point, all bets are off as far as I'm concerned. Sure, the incumbents will have the subscribers and established brands, but the pressure will really be on them to defend their territory. Globalive won't be coming to market to compete on price - they'll be doing it with cool services that make smartphones worth every penny. If they hit the market with really innovative services, I think they'll give the incumbents a good run for their money. Looking at it this way, it really is about the network. Once that big barrier falls away, we'll see how well the incumbents will be able to compete with some real competition. In my mind, it's a bit like calling your bluff. If Globalive comes to market with the best network around, things could get very interesting.

- Oh - here's another reason why I think the network is the key to making Globalive a potential winner. I'm pretty sure they will end up being the only real rival to the 3 incumbents in terms of market coverage. They may choose to stay out of Quebec, or simply partner with someone like Videotron there, which would give them Canada-wide service. Either way, Globalive will be a natural magnet for regional carriers looking to expand coverage or MVNOs seeking to capture some niche markets.It's hard imagine anyone else having the means or motivation to build yet another national network once all the licenses are spoken for. MVNOs have had a hard time succeeding anywhere, but hey - if Globalive has a really great network, they will be able to support a much more interesting range of services than what MVNOs are offering today. So, if they were thinking along these lines, they will overengineer their network to provide enough capacity to accommodate over the top providers. This will generate more revenues, with hardly any additional expense, which in turn will accelerate their ROI. Nothing wrong with that.

I still have a lot of reservations about how successful any new entries will be to our wireless market. Now that I look at where Globalive stands today, I'm a lot more optimistic about their chances. The odds are still long, but Globalive brings a lot to the table, and I really don't see how anybody else comes close.

The big question now becomes how will the incumbents respond? If they still feel this will remain a cozy club of three and stand pat, I think they will be in trouble if my view of Globalive is on target. What if they don't upgrade their networks? What if they don't innovate with new services and just try to compete on price? Just look at the way Rogers is coming to market with the iPhone. No way this tactic is going to work once Globalive comes to town, especially if they're GSM.

Pretty interesting scenarios to say the least. Y'know, this Globalive thing might just work. Thoughts???

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1 comment:

ipcom said...

Posted by: Jon Arnold

Thanks for your comment, Derik. You raise some good issues but I don't have anything to add about how how the incumbents will respond beyond what my posts have been saying. I'm happy to engage with you for some consulting work if you really want to learn more, but otherwise, you're best to just follow the mainstream media and the blogs.