Columns

You call this a business?

Ross Laver August 16 1999
Columns

You call this a business?

Ross Laver August 16 1999

You call this a business?

Columns

Ross Laver

Talk is cheap, and getting even cheaper. Which is great if you make a lot of longdistance calls, but not so nice if you’re in the phone business.

That, in brief, explains what is happening these days in Canadas telephone industry. In only a few years, residential long-distance has gone from a high-margin monopoly to a competitive killing ground. With prices spiralling downward, some of the biggest players have opted to get out of the business entirely. The rest are being squeezed by declining revenues. Some of the weaker firms probably won’t survive.

It’s a far cry from the situation five years ago, when everybody and his brother was scrambling to break into the longdistance market. Conventional wisdom back then said there was big money to be made by undercutting traditional carriers. And thanks to deregulation, it was a relatively easy business to get into. The established players—

Bell Canada and the other phone utilities—were required by law to give new carriers access to their networks. On top of that, they were prohibited from matching the newcomers’ discounted prices.

In effect, the Canadian Radiotelevision and Telecommunications Commission was forcing Bell and its allies to compete with one hand tied behind their backs. But that lasted only as long as it took for the new entrants to get established. On Jan. 1, 1998, the CRTC waived most of the regulatory restrictions, triggering an all-out price war.

Two things have since become obvious. First, long-distance is no longer the exciting, lucrative business it appeared to be just a few years ago. Second, contrary to some predictions, profit margins in the residential market are even lower than in the corporate market. Often, they’re non-existent.

The company that best symbolizes the transition is CallNet Enterprises Inc. ofToronto, which owns Sprint Canada. Its shares, which traded in 1993 at $9.50, climbed all the way up to $30 in 1997. It’s been downhill ever since. In Call-Net’s most recent quarter, it lost $ 125 million on revenues of $323 million. The shares closed last week at $8, down 64 per cent in the past year. Call-Net’s problem is simple: 92 per cent of its customers are in the residential market, and every time it cuts its prices, Bell and the other carriers match Call-Net’s rates. Fed up with the losses, a group of disaffected shareholders last week demanded the resignation of Call-Net

CEO Juri Koor. The dissidents want to sell the company to a larger competitor—something Call-Net said on Friday it is willing to consider.

Most of Call-Net’s rivals in Canada are faring better financially, but only because they depend less on the residential market. BCT.Telus, created by the merger of B.C. Tel and Alberta’s Telus Corp., reported a small profit in the latest quarter but suffered a six-per-cent drop in long-distance revenues. Montreal-based BCE Corp., parent of Bell Canada, also experienced a decline in long-distance billings. Another BCE affiliate, Teleglobe Inc., saw its stock fall 22 per cent after it warned that its earnings would be hurt by falling prices and increasing capacity in the international long-distance market. Significandy, the company generating the most interest among investors right now is AT&T Canada Inc., which began life in 1990 as Unitel. It struggled in vain for years to make a profit before finally concluding that consumer long-distance was a mug’s game. The company sold that part of its business in May to Primus Telecommunications Group Inc. of McLean, Va., and is now concentrating on providing voice, data and wireless services to corporate customers. (As part of that strategy, parent company AT&T Corp. last week bought a third of Toronto-based Rogers Can tel Mobile Communications Inc. in partnership with British Telecom.) Meantime, five-year-old Primus has stormed into Canada with guns blazing, unleashing another round of price cuts that promises to make life even more treacherous for its longdistance rivals. “With deregulation, your costs decline every month,” says Ted Chislett, president of Primus Canada. “The key is to stay flexible and keep your eye on the bottom line.” It doesn’t take a genius to see where this is going. Long distance, once the most glamourous part of the phone business, is rapidly becoming a commodity as new competitors dive into the market and the attention of the world’s telecom giants turns to data traffic. “For all intents and purposes, voice is becoming irrelevant,” says Blake Hanna, a telecommunications expert at Andersen Consulting in Toronto. “You have to ask yourself how long it will be before the phone companies start paying us to get our business.” Whether or not it comes to that, it’s clear there will soon be only two kinds of long-distance companies: the quick and the dead.