Cogeco pointed to consumer frustration with high wireless prices as a reason for entering the sector

Canadians greedy for more competition in the wireless sector welcomed Cogeco Communications Inc.’s revelation that the cable company is considering a foray into the mobile business.

But analysts question whether the strategy to make Cogeco the fifth wireless player in its operating markets of Ontario and Quebec will succeed given the competitive and regulatory realities of Canada’s wireless market.

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While wireless bills remain higher in provinces with less competition, prices recently fell sharply in Ottawa where five providers operate (the Big Three, Shaw Communications Inc.’s Freedom Mobile and Quebecor Inc.’s Videotron), Desjardins analyst Maher Yaghi noted in a Friday report.

“Hence, we believe it would be very difficult for Cogeco to realize profits from a wireless venture,” Yaghi wrote, though he added that a wireless offering could help Cogeco retain internet, television and telephone customers on the wired side of its business.

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On a call with analysts this week, chief executive Louis Audet pointed to consumer frustration with high wireless prices and increasing synergies between wired and wireless networks as a reason for entering the sector. Cogeco stock jumped 9 per cent on the news on Thursday, taking its year-to-date gains to 17 per cent.

Despite the synergies, Yaghi questioned whether a push for lower prices makes it an attractive time to enter the market.

“We are unsure that negative pressure on average revenue per user growth from the public actually creates a better environment for a new wireless entrant,” he wrote.

In May and June, Cogeco bought additional spectrum, the airwaves necessary to operate wireless networks. This week, it said wireless was its third investment priority after expanding its U.S. operations through acquisitions and investing in existing cable networks. It said it would likely pursue a “hybrid” model where it owns some wireless infrastructure and partner with another operator for the rest.

Essentially, it would function in part as a mobile virtual network operator (MNVO) that sells services on someone else’s network. Despite a call from the federal government to look into their viability, MVNOs are not mandated in Canada. As such, few exist since incumbent wireless operators tend to be reluctant to sell wholesale access to their facilities after spending billions on their networks.

Barclays analyst Phillip Huang noted to clients Friday that Cogeco would need to find a partner with scale, capital and expertise to help it build a network. Even with a partner, he noted that Cogeco is still much smaller than existing players Shaw and Videotron, serves smaller markets and has less spectrum.

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“We currently do not see sufficiently compelling reasons for either Shaw or Videotron to dilute their wireless growth opportunity and partner with Cogeco on even modestly favourable terms,” Huang wrote.

He questioned whether Cogeco’s comments that it may participate in the auction for 600 MHz spectrum – high value frequencies needed for next generation mobile services – is a tactic to negotiate an MVNO agreement with Shaw or Quebecor, both of which want to buy more spectrum.

Despite the challenges with a hybrid strategy, Huang believes the move towards wireless is the right move.

“We have long written that Cogeco’s future in Canada would be disadvantaged without wireless, and so we applaud management’s efforts to explore options to enter wireless.”