Andrew Willis: There’s a new kid on the block challenging the oligopoly held by the Big 3 phone companies.
Freedom Mobile is here to ‘free’ you from the shackles of your existing phone plans, with way, way better deals. What does this mean for the Big 3 telecom companies – Telus (T), Rogers (RCI.B) and Bell (BCE) – and more importantly, Freedom’s parent company, Shaw Communications (SJR.B)?
Our sector analyst Matthew Dolgin says that while the Big 3 are still well entrenched, Freedom is a threat that is eating away at their growth. But, this competition is coming at a cost to Freedom. Their promotional pricing dynamic is likely leading to losses for Shaw’s wireless business, which will make it harder to expand its Canada-wide wireless network coverage, currently one of Freedom’s key weaknesses.
But there may yet be hope. Matthew says that the Big 3 may have to begin sharing their networks on a wholesale basis. And in 2020 and 2021, there will be federal auctions for new cellphone bands – that’s where Freedom has an advantage. They get their own separate auction since they’re a smaller player – which likely means they’ll pay less for an opportunity to upgrade, and perhaps set themselves up for 5G services.
Back to Shaw.
We think the stock is slightly undervalued and Matthew assigns it a narrow moat, thanks to its wired business that has significant scale and cost advantages. Freedom will actually weigh on Shaw for the next few years – after all, a high-quality wireless network is mighty expensive to build. This isn’t a sign to head for the hills. This cost will gradually reduce, and we project a return on invested capital hitting 8% by 2020.
However, Freedom’s success will depend on growing their customer base, which comes with higher costs, and eventually higher prices. And at the end of the day, it may be tough to hold onto customers you’ve lured with bargain prices when the bargain goes away.
For Morningstar, I’m Andrew Willis.
