A reality check on Quebecor’s ambitions after 5G spending spree

Will we finally witness the revenge of the “scallywags” in a 5G world? That, of course, is the saucy sobriquet the late Ted Rogers, founder of Rogers Communications Inc., gave wireless new entrants, including Quebecor Inc., after they bemoaned a lack of competition for cellular services back in 2007.

Fourteen years later, Quebecor’s Videotron Ltd. is one of the last startups still standing and is again vowing to shake up Canada’s wireless market after winning big in a federal spectrum auction of 5G airwaves.

Videotron, which received preferential access to some of that 3500 MHz spectrum, surprised analysts by shelling out almost $830-million on 294 wireless licences across the country.

More than half the money is being spent on spectrum outside its home market of Quebec, including in parts of Ontario, Manitoba, Alberta and British Columbia.

But will Videotron actually become a sustainable competitor to the Big Three carriers across the country even though other standalone wireless carriers have failed and most people already own a smartphone? Canadians should be skeptical. “We now intend to take on and break that oligopoly in English Canada to provide Canadians in Ontario, Manitoba, Alberta and B.C. with the same competitive pricing and client experience that have made our success in Quebec,” Quebecor president and CEO Pierre Karl Péladeau told analysts.

Good luck with that.

Yes, Quebecor has given Rogers, Bell and Telus a run for their money in Quebec, where it offers multiple telecom services and where the majority francophone population has a deep affinity for its brands.

But pulling off that same feat in the rest of Canada – as a wirelessonly player, no less – will take a heck of a lot more than just spectrum and swagger. Just ask Shaw Communications Inc., which has a larger market capitalization than Quebecor, but is nonetheless selling itself to Rogers after determining it couldn’t find a path forward on its own for 5G.

If you’re wondering how Videotron will avoid a similar fate, you’re far from alone. Its national expansion plans remain a mystery. Will Videotron build out its own national wireless network? Or will it mostly operate as a wireless reseller outside Quebec by piggybacking on existing networks? Are its national ambitions contingent on acquiring Freedom Mobile (currently owned by Shaw) on the cheap?

Mr. Péladeau is being coy about those specifics, saying only that all options are on the table.

Here’s what we do know: There’s no certainty Videotron will end up owning Freedom Mobile, even if regulators force Rogers to divest it. And if Videotron does acquire it, there’s no guarantee the business will be profitable.

Keep in mind a Shaw executive recently told a parliamentary committeeFreedomMobileisstill not generating positive free cash flow, despite costly outlays on spectrum and network investments since 2016. Upgrading its network to 5G will cost big bucks.

There are also plenty of other hurdles for Videotron to overcome.

Most consumers buy their wireless services through multiservice bundles, which will make it difficult for Videotron to wrest significant market share from entrenched players outside Quebec.

Although Bell and Telus are successful wireless carriers outside their current territories, they benefit from a significant cost structure advantage because of their national network-sharing agreement. Videotron doesn’t have that benefit.

What’s more, Videotron and its Fizz flanker brand are not well known in English Canada. Although a good advertising campaign can remedy that problem, Mr. Péladeau’s views on Quebec independencemayrubsomeconsumers in the rest of the country the wrong way (especially since Canadians have provided Videotron with generous implied taxpayer subsidies through federal auction policies over the years).

This is hardly the first time that Videotron has purchased spectrum outside Quebec and purred about its national wireless ambitions. In 2008, for instance, Videotron purchased a block of advanced wireless services spectrum in Toronto for $96.4-million. It later sold those fallow airwaves to Rogers in 2017, for $184.2-million, earning a profit of $87.8-million.

In 2017, Videotron made a $243.1-million profit after selling seven 700 MHz and 2500 MHz licences it had previously acquired in Southern Ontario, Alberta and British Columbia to Shaw.

Those past spectrum sales raise doubt about the longevity of Videotron’s renewed national wireless ambitions. After all, its executives expressed similar sentiments in 2008 and 2014.

Quebecor is definitely creating a stir with its latest spectrum spending spree. Score one for the surviving “scallywags,” but they’re a long way from smashing the oligopoly. Everyone loves an underdog. But talk is cheap. We’ve heard it all before.

This time, Videotron must prove to Canadians it’s serious about going national and has the deep pockets to compete.