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5.0 Telecommunications

5.1 Telecommunications - Financial review

This section provides a broad overview of the financial performance of the telecommunications industry and examines various financial indicators such as revenue trends by market segment and by type of service provider, profitability, and capital intensity.

Telecommunications revenues include revenues from wireline and wireless services. Wireline service revenues include local & access, long distance, data and private line, and Internet service revenues. They exclude revenues from terminal equipment sales and rentals. Wireless service revenues include revenues from mobile and paging services and revenues related to terminal equipment.

a) Telecommunications revenues overview

Retail telecommunications revenues increased from $34.8 billion in 2007 to $36.8 billion in 2008, an increase of $2.0 billion, or 5.6%, while wholesale revenues increased from $3.4 billion in 2007 to $3.5 billion in 2008, an increase of $0.1 billion, or 4.2%. Retail revenues as a percentage of total revenues remained relatively unchanged over the previous year at 91.3%. The major contributors to wholesale revenues in 2008 were long distance (23%), local & access (24%), and data and private line (30%).

Over the 2003 to 2004 period, wireless revenue growth continually increased from 14% in 2003 to 18% in 2004. After peaking in 2004, wireless revenue growth declined 10.4% in 2008, resulting in an annual growth over the 2004 to 2008 period of 14.0%. Wireline growth has essentially been flat over this period, increasing slightly in 2008 by $0.6 billion, or 2.5%, from the previous year, resulting in a cumulative annual revenue growth over the 2004 to 2008 period of 0.3%.

b) Revenues by market segment

Wireline voice revenues, consisting of revenues from local & access and long distance services, represented approximately 57% of wireline revenues, a decline of 0.9%, or $0.2 billion, in 2008. Non voice wireline services such as Internet and data and private line represented 43% of wireline revenues, an increase of 7.3%, or $0.7 billion.

A notable trend exhibited in these results is the continuation of consumer adoption of the newer non legacy services such as Internet and wireless services, as well as the business customers' preference for the newer data protocol services such as IP VPN and Ethernet. Between 2004 and 2008, growth was driven from these non-legacy or newer type services while services such as local & access, legacy data and private line, and long distance have continued to decline.

Not surprisingly, non-legacy service revenues represented 58% of the total telecommunications revenues in 2008 compared to 43% in 2004. This change was driven by dynamics such as consumer preferences, service innovations, and technological advancements. Internet and wireless were the major drivers to the significant increase in non-legacy service revenues between 2004 and 2008. The revenues from these two market segments accounted for 55% of total telecommunications revenues in 2008, compared to 41% in 2004.

c) Revenues by type of service provider

Total retail telecommunications revenues in 2008 were approximately $36.8 billion, up 5.6% from 2007. Of these revenues, $15.6 billion, or 42%, were related to wireless services and the remaining $21.2 billion, or 58%, were related to wireline services. Approximately $11.4 billion, or 54%, of these retail wireline revenues were related to residential services, and $9.8 billion, or 46%, were related to business services.²²⁰

In 2008, the incumbent TSPs generated approximately 56% of the total wireline and wireless revenues from their traditional operating territories. When operating outside of their traditional operating territories, they captured an additional 11% of the telecommunications revenues. Facilities based, non incumbent TSPs and resellers had approximately 28 and 5% of the telecommunications revenues, respectively. There was a notable shift in revenues of approximately 2% from incumbent TSPs (excluding out of territory) to facilities based, non incumbent TSPs between 2007 and 2008.

Figure 5.1.5 summarizes the various types of TSPs and their share of the industry's revenues in 2008. There are two groups of service providers that stand out within this chart. The resellers represented 69% of the service providers, and as a group they captured approximately 5% of the industry's revenues in 2008. At the same time, the large incumbent TSPs (excluding out of territory), representing less than 2% of the total number of service providers, captured approximately 55% of the revenues in 2008 which made them the largest group with respect to revenues.

A summary of total telecommunications services revenue, by type of service provider, for the period 2005 to 2008 is provided in Table 5.1.3.²²¹ As this table demonstrates, the incumbent TSPs' (excluding out of territory) share of the total telecommunications revenues steadily decreased from 65% in 2004 to 56% in 2008. Excluding their out of territory operations, incumbent TSPs' revenues increased by approximately 1.9% to $22.7 billion. Resellers saw their revenues increase by 3.7%, or $66 million, in 2008. The facilities based TSPs' revenues increased 11% to $15.8 billion, which was mainly attributed to the cable BDUs' 16% revenue growth in 2008.

With respect to wireline services, as displayed in Table 5.1.4, incumbent TSPs (excluding out of territory) had between 63 and 70% of their revenues in the residential, business, and wholesale markets in 2008. One of the most notable results was the 5% shift in residential market share from the incumbent TSPs to the facilities-based, non-incumbent TSPs in 2008. When operating outside their traditional operating territory, the incumbent TSPs also saw their business market drop from 15 to 12%, however, they were able to increase their wholesale market slightly by 1% to 19% in 2008.

d) EBITDA and EBITDA margin

The increasing range of communications services that incumbent TSPs and cable BDUs provide are becoming less of a reflection of what their traditional service offerings were but rather a reflection of the convergence trends in the industry. Over the past years, incumbent TSPs have consistently grown their BDU revenues by 15 to 20%, while cable companies have also seen tremendous growth in their telephony service revenues.

With respect to their wireline operations in 2008, which encompassed telecommunications operations as well as programming and non-programming BDU activities, the incumbent TSPs reported a $6.3 billion EBITDA and a 29.1% EBITDA margin, while the cable companies reported a $3.9 billion EBITDA and a 44.6% EBITDA margin.

The wireless industry EBITDA increased from $6.5 billion in 2007 to $7.2 billion in 2008, a 9.9% increase. Of this amount, the incumbent TSPs and cable companies accounted for $4.5 billion and $2.8 billion, respectively.

e) Capital expenditures and capital intensity

Capital expenditures are one of the main costs of providing telecommunications services. These costs are primarily investments in fixed assets such as property, and plant and equipment, and are an important element in the growth strategy of the industry. This section presents the industry capital expenditures and capital intensity ratios (i.e. capital expenditures as a percentage of revenues) over the 2004 to 2008 period.

Capital expenditures

In 2008, incumbent TSP and cable BDU expenditures included, but were not limited to, the purchase of advanced wireless services (AWS) spectrum, enhancements to wireless networks, expansion of fibre to the node (FTTN) facilities, as well as expansion of wireless and DSL capacity and coverage. After rolling out their 3G and 3G-equivalent wireless networks in late 2004 and early 2005, Bell Canada, TCC, and Rogers Communications Inc. (RCI) continued to expand their high speed mobile network coverage to additional urban centres and various cottage country locations. The incumbent TSPs continued to make expenditures on IPTV.

Total telecommunications capital expenditures, including the 2008 AWS spectrum auction, were $12.0 billion in 2008, an increase of 54.1% from the $7.8 billion in 2007. Wireless capital expenditures increased by 220% to $6.1 billion in 2008 from $1.9 billion in 2007. Wireline capital expenditures, representing approximately 49% of telecommunications capital expenditures, increased slightly from $5.88 billion in 2007 to $5.91 billion in 2008, an increase of 0.5%. Excluding the AWS spectrum expenditures, the total telecommunications capital expenditures decreased slightly from $7.8 billion in 2007 to $7.7 billion in 2008. The wireless capital expenditures decreased by 4.1% to $1.8 billion and wireline capital expenditures represented approximately 76% of telecommunications capital expenditures in 2008. In 2008, the incumbent TSPs' capital expenditures were approximately 70% of total wireline capital expenditures, compared to 71% in 2007.

The non incumbent, facilities based alternative TSPs increased their capital expenditures from $1.6 billion in 2007 to $1.7 billion in 2008.

Capital intensity

Capital expenditures, as a percentage of revenue, varied significantly by type of TSP. In 2008, excluding AWS spectrum expenditures, the wireless providers' capital intensity was 11%, for the wireline incumbent TSPs (including their out-of-territory operations) it was 23%, and for the non-incumbent, wireline facilities-based alternative TSPs it was 35%. Over the 2003 to 2008 period, wireline facilities-based, non-incumbent TSPs consistently increased capital expenditures as a percentage of revenues. By 2008, they had increased this ratio by more than threefold from 11% in 2003 to 35% in 2008.

In 2008, wireless service providers' capital expenditures, including expenditures on AWS spectrum, were over $6.1 billion, resulting in a capital intensity of 38%. These expenditures expanded 3G or 3G-equivalent wireless coverage from 78% of the Canadian population in 2007 to 91% in 2008.

f) Inter carrier payments

In providing telecommunications services, a TSP can either build its own network by incurring capital expenditures or the TSP can acquire access to the facilities of another TSP. The payments made to acquire access to facilities from another TSP are referred to as inter carrier payments. These services can be acquired either from incumbent TSPs for services that may or may not have a tariff, or from non incumbent TSPs. Incumbent TSP services may include unbundled loops, co location, access tandem, direct connect, Centrex, and private line. Non incumbent TSP services may include items such as PSTN connections and interexchange private line. In 2008, the Commission identified six categories of competitor services: a) essential, b) conditional essential, c) conditional mandated non-essential, d) public good, e) interconnection, and f) non-essential subject to phase-out.²²²

In 2008, wireline inter carrier expenses for all TSPs represented approximately 11% of total wireline revenues. During the same period, the reseller inter carrier expenses were approximately 37% of their revenues versus 42% in 2007, followed by the facilities based, non incumbent TSPs at 14%, a decrease from 17% in 2007. The incumbent TSPs remained unchanged at 8%.

Statistical information - Telecommunications

Table 5.1.1 Retail and wholesale telecommunications revenues²²³ ($ billions)

											Growth	CAGR
	2004		2005		2006		2007		2008		2007-2008	2004-2008
Wireline
Retail	21.1		20.6		20.5		20.8	#	21.2		1.9%	0.2%
Wholesale	2.9		2.9		2.9		2.9	#	3.1		6.4%	1.2%
Wireline total	24.0		23.5		23.4		23.7	#	24.3		2.5%	0.3%
Wireless
Retail	9.4		10.9		12.2		14.0	#	15.6		11.1%	13.5%
Wholesale	0.1		0.1		0.5		0.5		0.5		-8.0%	n/a
Wireless total	9.5		11.0		12.7		14.5	#	16.0		10.4%	14.0%
Retail total	30.5		31.6		32.7		34.8	#	36.8		5.6%	4.8%
Wholesale total	3.0		3.0		3.3		3.4	#	3.5		4.2%	4.0%
Total	33.5		34.5		36.1		38.2	#	40.3		5.5%	4.8%

Source: CRTC data collection
Note:  n/a: not available

Figure 5.1.1 Telecommunications revenues and percentage annual growth

Table 5.1.2 Telecommunications revenues, by market segment ($ billions)

											Growth	CAGR
	2004		2005		2006		2007		2008		2007-2008	2004-2008
Wireline
Local and access	9.7		9.8		9.6		9.5	#	9.6		0.1%	-0.4%
Long distance	5.7		5.1		4.7		4.3	#	4.2		-3.1%	-7.5%
Voice subtotal	15.4		14.9		14.4		13.9	#	13.7		-0.9%	-2.8%
Internet	4.2		4.5		5.0		5.7		6.2		9.4%	10.5%
Data and private line
Newer data protocols	0.6		0.7		0.9		1.1	#	1.3		19.0%	23.0%
Legacy data and private line	3.8		3.4		3.0		3.0	#	3.0		-1.0%	-5.9%
Data and private line total	4.4		4.1		4.0		4.2	#	4.3		4.4%	-0.4%
Non-voice subtotal	8.6		8.6		9.0		9.8	#	10.5		7.3%	5.3%
Wireline total	24.0		23.5		23.4		23.7	#	24.3		2.5%	0.3%
Wireless	9.5		11.0		12.7		14.5	#	16.0		10.4%	14.0%
Total	33.5		34.5		36.1		38.2	#	40.3		5.5%	4.8%

Source: CRTC data collection

Figure 5.1.2 Annual revenue growth, by market segment

Figure 5.1.3 Distribution of telecommunications revenues, by market segment

Figure 5.1.4 Total telecommunications revenue market share, by type of service provider (2008)

Figure 5.1.5 Total telecommunications revenue market share, by type of service provider (2008)

Table 5.1.3 Total telecommunications revenues, by type of service provider ($ millions)

	2005		2006		2007		2008
Incumbent TSPs
Large incumbent TSPs	25,617.3		25,822.8		26,245.0		26,728.2
Small incumbent TSPs	367.7		372.5		465.2	#	440.0
Subtotal	25,985.0		26,195.4		26,710.2	#	27,168.2
Less: Incumbent TSPs (out-of-territory)	3,721.6		3,849.0		4,433.7		4,461.0
Incumbent TSPs (excl. out-of-territory)	22,263.4		22,346.4		22,276.5	#	22,707.3
Percent of total	65%		62%		58%	#	56%
Alternative TSPs
Facilities-based, alternative TSPs
Incumbent TSPs (out-of-territory)	3,721.6		3,849.0		4,433.7		4,461.0
Cable BDUs	6,583.5		7,731.9		9,231.6	#	10,671.1
Utility telcos and other carriers	152.5		343.6		488.1	#	626.2
Subtotal alternative TSPs	10,457.6		11,924.5		14,153.5	#	15,758.3
Resellers	1,788.5		1,798.4		1,774.5	#	1,840.4
Total facilities-based, alternative TSPs and resellers	12,246.1		13,722.9		15,928.0	#	17,598.6
Percent of total	35%		38%		42%	#	44%
Total	34,509.5		36,069.3		38,204.5	#	40,305.9

Source: CRTC data collection

Table 5.1.4 Wireline telecommunications revenue market share (%), by type of service provider (2008)

	Retail			Wholesale	Total
	Residential	Business	Total
Incumbent TSPs (excl. out-of-territory)	62.6	69.2	65.7	68.2	66.0
Alternative TSPs
Incumbent TSPs (out-of-territory)	0.1	12.1	5.7	19.2	7.4
Facilities-based, non-incumbent TSPs	31.1	10.3	21.4	10.7	20.1
Resellers	6.2	8.4	7.2	1.9	6.5
Alternative TSP subtotal	33.1	31.2	32.2	34.0	32.4

Source: CRTC data collection

Figure 5.1.6 Total business market wireline revenue²²⁴ distribution, by customer size and type of provider (2008)

Figure 5.1.7 Telecommunications revenues and EBITDA margins

Table 5.1.5 Capital expenditures, by type of TSP ($ billions)

											Growth	CAGR
	2004		2005		2006		2007		2008		2007-2008	2004-2008
Wireline
Incumbent TSPs (including out-of-territory)	4.2		3.6		4.0		4.2	#	4.1		-1.4%	-0.5%
Alternative TSPs
Non-incumbent, facilities-based alternative TSPs	n/a		0.6		1.2		1.6		1.7		5.6%	na
Resellers	n/a		0.1		0.1		0.1		0.1		-2.5%	na
Alternative TSPs Total	0.4		0.7		1.3		1.7		1.8		5.2%	45.4%
Wireline total	4.6		4.2		5.3		5.9	#	5.9		0.4%	6.5%
Wireless	1.1		1.4		1.7		1.9		6.1		220.2%	53.3%
Wireline and wireless total	5.7		5.6		6.9		7.8	#	12.0		54.1%	20.4%

Source: CRTC data collection
n/a: not available

Figure 5.1.8 Capital expenditures as a percentage of revenues, by type of TSP (includes AWS expenditures in 2008)

Figure 5.1.9 Wireline inter carrier expenses as a percentage of revenues, by type of TSP