Wireless substitution - more than just voice

Wireless substitution has been a term used to refer to the replacement of wireline telephone service with wireless service. Many people will use their wireless phone to make voice calls even when a wireline phone is at hand. This trend has been going on for some time but has not been particularly disruptive to wireline phone service subscriptions. The real impact is from individuals that rely entirely on wireless service and have no wireline phone service. 

Statistics Canada reported that about 8% of Canadian households had wireless as the only telephone service in the home in 2008. This is up from 5% in 2005.  Another 74% of households had at least one wireless subscriber.

Other surveys indicate that the incidence of wireless only households has continued to grow. IDC Canada reported in June 2009 that 11.6% of Canadian consumers use wireless as their only phone service. By June 2010, another 4% had joined their ranks, bringing the total to 15.6%, according to IDC Canada's latest survey.  This equates to almost 12% wireless only households when adjusted for the proportion of Canadian households with a wireless phone.

The rise in wireless only households has been accompanied by a decline in wireline subscribers. Local wireline connections peaked in Canada in 2006 at 21 million, based on CRTC statistics. Three years later, there were 650,000 fewer wireline connections. Wireless subscriptions now surpass wireline, reaching almost 24 million in 2009.

Source: CRTC, Communications Monitoring Reports

There is evidence that the rate of substitution of wireless over wireline is going to continue to ramp up.  The IDC Canada survey released in June 2010 found that the percentage of Canadians who are thinking about going wireless only is 14% higher in 2010 than in 2009. 

At some point, it may become normal to expect to reach most people via a wireless connection rather than wireline. This point may already be within sight in the United States where one in four households had already switched to wireless only in 2009, according to data published by the Centers for Disease Control and Prevention. An additional 15% of U.S. households relied on their wireless phones for all or almost all of their calls. Combined, 40% of U.S. households fall into the categories of wireless-only or “wireless-mostly”.

Canadian trends in wireless only have tended to track those of the United States with about a three year lag. Canadian wireless only households could reach 25% in 2012, based on patterns in the U.S. 

The proportion of Canadian households expected to be wireless-only is forecast to reach 28% by 2014, according Convergence Consulting Group, as indicated in a chart published in the print version of the Globe and Mail's Report on Business for September 20, 2010 (page B3). 

Is it possible that one-third of Canadian households will be wireless only within the next five years? One major driver is the rapid rate at which wireless services and devices are adding new functionality and therefore becoming more highly valued compared to a wireline service.

Wireless service and devices offer an increasing range of advantages over wireline, far beyond just mobility.  They enable a whole range of communication tools: text/picture/video messages and emails, as well as the ability to stay in contact with social media and access the web on the go. Wireless phone can also be used to watch videos, listen to music and access multitudes of applications including location-based applications.

As more consumers subscribe to wireless services and advanced features, it will spur growth among an ever-widening circle of contacts.  The substitution effect will accelerate further with shifts in the relative prices and further enhancements in wireless devices.


Ranking Canada’s broadband performance

The Berkman Center for Internet & Society at Harvard University released the final version of its report Next Generation Connectivity, A review of broadband Internet transitions and policy from around the world.  The final version incorporates some updates and revisions and as a result, Canada moved up the rankings from 22nd to 19th out of 30 countries.

Canada’s ranking according to the Berkman Center’s report gives the impression that broadband service is relatively poor in this country.  However, closer examination of key indicators shows that Canada’s results are not substantially behind many of those in the top tier. 

Canada’s broadband penetration is within a few percentage points of the top three countries, particularly when household penetration rather than per capita measures are used. 

Canada’s broadband service delivered download speeds that are within 1.5 Mbps of the fastest countries (after Japan and South Korea), as measured by Akamai’s “State of the Internet”, as noted in the previous observation

Canada’s broadband service prices, at least for cable modem services, compare favourably with those in highly-ranked countries such as Denmark and the Netherlands, as shown in the following chart taken from a recent submission by the Canadian cable companies.

As was noted in an observation posted after the draft report was released, the Berkman Center’s rankings were based on penetration (service adoption), speeds and prices.  The final version fixed some aspects that were problematic in the draft report but the vast majority of the indicators remain unchanged for Canada. 

First, more data on prices was incorporated from a new source – Point Topic that included more recent price information from mid-2009 and, in Canada’s case, prices for services with speeds greater than 35 Mbps that had not been used for the rankings in the draft report.

Second, it abandoned the practice of assigning a last place score for any indicator for which there was no data available. 

Taken together, these changes had the greatest impact on Canada’s ranking on relative price of broadband service, which improved from 25th to 19th

However, Canada’s ranking on price remains biased downwards because the Berkman Center continued to rely heavily on OECD data, which has flaws as previously discussed. In addition, it excluded pricing information from all but the top four service providers.  In response to an earlier critique posted here, the Berkman Center stated at footnote 57 that it only looks at the top four providers and in doing so it excluded Vidéotron. 

The rationale for taking data for the top four might be justified in countries where there is a legacy of a single national provider (often formerly government-owned) and competitors that rely on national access to that provider’s infrastructure and/or are affiliates of incumbent providers in other countries.  However, in Canada, the market is mainly served by regional providers facing different market conditions that can affect the price and services offered.  These are not “smaller, more marginal providers, who might be small providers in uncompetitive remote markets or who are not well known to customers” as stated in the Berkman Center report.

Including only the top four providers in Canada excludes more than 30% of the market based on subscriber numbers. In fact, recent reports of subscriber numbers suggest that Vidéotron has edged out TELUS for fourth place.  Interestingly, the Berkman Center appeared to have calculated the price of broadband based on the top five providers as noted at footnotes 58 and 226 and found that the prices for Canada decreased as a result.  If these results had been incorporated into the analysis, it is likely that Canada’s ranking would have improved further.

The other notable change was the addition of an indicator for average download speed achieved based on Akamai’s “State of the Internet”.  However, this data was blended with the same data from the draft that used the flawed OECD data on advertised speeds and’s data on user-generated speeds (see discussion here).  Interestingly, adding the one indicator from Akamai improved Canada’s ranking from 20th to 17th on service speed.  Even more significantly, this was based on Akamai’s “State of the Internet” report from the fourth quarter of 2008 when Canada ranked 13th among OECD countries.  The most recent report indicated Canada ranked 10th



Actual broadband speeds: Canada in good company

Canadian broadband service has been criticized for being too slow.  However, information from Akamai Technologies Inc. indicates that actual achieved speeds of broadband service in Canada compare positively with several countries.  This is according to data that Akamai collects from 444 million unique IP addresses in countries around the world.

Akamai’s “State of the Internet” report for the third quarter of 2009 reported that the average achieved speed was 4.25 Mbps downstream for wireline internet connections in Canada.

Most OECD countries were reported to be delivering similar speeds, with the exception of South Korea and Japan.  Sweden ranked third after these two countires, with an average speed of 5.7 Mbps, only 1.5 Mbps greater than the average in Canada.  As shown in the chart below, several countries achieved speeds in the 4 to 6 Mbps range.  Most users would find little difference in their internet experience within this range.

Canada’s average speed of 4.25 Mbps downstream reflects the types of services to which consumers subscribe.  If the bulk of subscriptions are concentrated among tiers of service with maximum speeds of 5 Mbps, then the achieved speed will tend to be closer to that, regardless of the potential speeds of the fastest service tiers.  In 2008, more than 40% of Canadian subscribers used a service with advertised speeds of less than 5 Mbps.

Further details from the Akamai report indicated that 77% of internet connections in Canada achieved speeds of at least 2 Mbps or greater and 24% were at 5 Mbps or greater.  Canada ranked tenth in terms of high broadband (5 Mbps or greater) connections per capita.


Cable operators more growth in telecom than video

The four largest cable operators in Canada posted overall growth in revenues of approximately 12% in 2009 compared to 2008, according to information posted by the CRTC.  Total revenues topped $8.3 billion for the period ended August 31, 2009.  Profit (before interest and taxes) reached $2.3 billion.  These results include the cable operators’ video programming services and their non-programming services – internet and telephony services.

Most of the growth was due to higher revenues from non-programming services, which increased by 24%.  Subscriber growth is likely the primary driver, with internet subscribers up more than 6%; and telephony subscribers up 23% between the third quarter of 2008 and 2009, as indicated in the four companies’ quarterly financial reports. 

Video services revenues increased by 7%.  A small portion of the increase can be attributed to subscriber gains of 1.4% - which is consistent with normal household growth.  Another source of the increase comes from subscribers adding digital services and related equipment (personal video recorders, high-definition set-top boxes).  Increases in the prices for video services account for some of the gains as well.

The faster growth in non-programming services has boosted these services to about 45% of the total revenues earned by the large cable operators.  Current trends indicate that these services could become the predominant source of revenues within the next couple of years.

Non-programming services already account for about two-thirds of operating income.  The higher operating income for these services is due to much lower operating expenses, which account for only about 25% of the total.  Non-programming services do not require expenditures on community channel or programming content (affiliation fees), which together account for 37% of cable operators’ total operating expenses.

There are a few gaps in the data publicly released for the cable operators that require some estimates to derive the profit before interest and taxes (PBIT) for the video programming and non-programming segments, respectively.  An allocation of the depreciation expense is necessary to determine the PBIT for video only services.  Information filed in a recent CRTC proceeding, combined with historical data, supports an allocation of about 65%.  

This analysis indicates the large cable operators earned PBIT from video services of less than $250 million – about 10% of the total profits before interest and taxes.

The following chart provides a comparison of the revenues and profits (PBIT) for video programming and internet & telephony services of the four large cable operators in 2009.


Canadian broadcasters increase foreign programming $$

Canadian broadcasters have felt the effects of the recession in the form of declining advertising revenues for their over-the-air broadcast stations.  This has been made evident in the CRTC's publication of financial data for selected companies the fiscal year ended August 2009.  

CTVglobemedia Inc. and Canwest Media Inc. – the two largest private OTA broadcasters – filed results indicating year-over-year ad revenue decreases of 6% and 9%, respectively. 

At the same time that broadcasters experienced decreased advertising revenues, CTV and Canwest increased programming expenditures by 5% and 8%, respectively.  Since programming expenditures represent some 80% of their total operating expenses, it is difficult to offset the decline in revenues through cuts in other expenses.

Expenditures on foreign programming increased, while those on Canadian programming decreased.  This widened the spending gap between foreign and Canadian programming expenditures.  In 2009, CTV spent $1.82 on foreign programming for every dollar spent on Canadian, while Canwest spent $2.12 on foreign programming for every dollar spent on Canadian. The chart below illustrates the relative levels of programming spending for each company in 2008 and 2009.

Canada’s main public broadcasters, CBC, continued to spend the vast majority of its programming budget on Canadian content.  However, CBC's English language stations also increased spending on foreign programming, from $26 million in 2008 to almost $40 million in 2009 - an increase of 52%.