New market entrants in Canada’s telecommunications industry are expected to push smart phone penetration, prepaid services and wireless substitution, but they are unlikely to affect the market for data services, says a new report. 

Released Monday by UBS Investment Research, and titled “Ten trends for 2010,” the report discusses the year ahead for the Canadian telecom industry. 

Analyst Phillip Huang, the report’s author, writes that it will take several years for wireless entrants to affect data services, currently monopolized by BCE Inc., Telus Communications Company and Rogers Communications Inc.

“We expect competition on wireless data to remain relatively rational between the three incumbent players encouraged by their common need to offset declining voice revenues,” says the report.

“We currently do not believe they will be a significant driver of competition in data services because of their narrower handset line-up, smaller coverage, less mature networks, and slower connection speeds. We believe the market structure for wireless data will remain oligopolistic for at least the next several years.”

A report released by RBC Capital Markets on Jan. 21 yields the same conclusion.

“Extrapolating … the carrier launches expected this year suggests that incumbent wireless results will likely not see a material impact from new competition for most of 2010,” says the RBC report, by analyst Jonathan R. Allen.

But new entrants such as Wind Mobile, Dave Wireless, and Public Mobile may ultimately be held back in the data plan market by no-subsidy, no contract sales pitches, said National Bank Financial analyst Greg MacDonald (who has yet to read the UBS report).

“For better or worse, smart phones today cost a lot of money,” he said in an interview.

“You are not likely going to sell a lot of smart phone plans to customers without subsidizing the handset. So if you look at Wind Mobile, they sell the Blackberry Bold for $450. In my opinion, you are not going to get significant growth in data customers at Wind when you are charging $450 for the handset.”

Contract subsidies may become less popular over the next several years, however. 

“Over time, as the price of handsets come down, the requirement to subsidize them will come down and the contract will disappear,” said MacDonald.

“But that’s not going to happen overnight. The average customer isn’t prepared to shell out $400-plus when they know they have to replace that handset every few years.”

In order to retain their customers, BCE, Telus and Rogers are likely to drive smart phone penetration to lock customers into contracts, according to the report.

“Equipped with more competitive handsets offerings, we expect Bell and Telus to drive harder on smart phone penetration in 2010, and regain some share of wireless data growth,” the report says.

The report also predicts an increase in prepaid services as incumbents offer lower costing plans to compete with entrants.

“We believe all standalone new wireless entrants (i.e. Wind, Public Mobile, and DAVE) will offer relatively attractive prepaid plans with big bucket minutes at affordable prices in order to differentiate from the incumbents,” it says.

“We expect the incumbents to respond by introducing similar prepaid plans. For instance, Rogers introduced earlier this week a $45 CityFido prepaid plan that includes 1,000 minutes, call features, and unlimited SMS in response to Wind’s $45 unlimited plan launched in December.”

Brownlee Thomas, a telecommunications analyst with Forrester Research, said she believes the competition between the big players may drive down data pricing.

"This threat of competition is causing the big players to play off one another, not so much against what they are expecting, but against the new players," she told The Wire Report.

"That competition between them means we can hope ... that we won't have to wait five years for better data plans. Our data plans in Canada are among the most expensive in the OECD [Organization for Economic Co-operation and Development] countries."

Quebecor’s Videotron will be launching its HSPA network in mid-2010, and may be one new entrant capable of creating competition in the wireless market in Quebec, Thomas said. 

"They [Videotron] are very aggressive. They have taken 30 per cent market share away from Bell Canada for residential services ... you can expect them to do the same for the wireless," Thomas said.

Newcomers in the wireless market are also likely to push wireless substitution in 2010, the UBS report says.

For the most part, wireless substitution has remained unfeasible in Canada because of the high cost of “big-bucket” wireless voice plans that include significant free minutes.

But as the new entrants promote these types of plans, incumbents are more likely to offer big-bucket plans of their own as more Canadian households are tempted go completely wireless.

“In 2010, we expect all three incumbent players (Rogers, BCE, and Telus) to have wireless plans and marketing aimed at wireline replacement, serving as a pre-emptive strike to new wireless players,” the UBS report says.

“We believe the incumbents would rather lose their landline customers to their own wireless businesses than to competitors.”

Last week, BCE Inc.’s president and CEO George Cope told BNN that the company is prepared to compete with any new entrants if, as some expect, Canada’s foreign ownership rules are relaxed.

Cope said Bell’s ability to bundle services brings the company a competitive advantage.

“We believe we have a competitive advantage on any of the new entrants,” Cope said. 

Faced with the incumbents’ defensive measures, news entrants may have to “sustain operating losses for an extended period of time,” the UBS report says.

“As we have seen … so far with Wind, new entrants will face challenges in distribution, network quality, and customer service in the early months, and this suggests share gains could be less than many investors expect in 2010,” says the RBC report.

“While WIND is making modest headway in the Toronto market, the launch was not as aggressive as we feared and we believe it will take time for WIND and other carriers to reach a full run rate.”

In order to drive funding, new players may be forced to consolidate with other companies, such as Shaw. 

According to the UBS report, Shaw, which currently owns 20-30 MHz of spectrum, is well-placed to acquire spectrum from new entrants, while Dave and Globalive own about 10 MHz each.

Thomas said the new entrants are more likely to partner than consolidate, saving them a regulatory probe into foreign ownership brought on by consolidation.

"There might be some consolidation, but I can see them more partnering. They are going to partner with Rogers first because they are going to be GSM [Global System for Mobile]," she said.

Huang, the UBS report’s author, was unavailable for comment Tuesday. 

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