How Has the Canadian Wireless Market Evolved?

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VINCE VALENTINI: Thanks very much, and welcome to our podcast on the Canadian wireless market. My name is Vince Valentini. I am the telecom analyst for Canada at TD Cowen.
Thrilled today to have the so-called disruptor in the Canadian wireless market, which is Quebecor, who owns the Freedom Mobile brand, and their chief financial officer, Hugues Simard, to discuss the recent trends in the wireless market, which has been quite tumultuous for the past year, year and a half since Quebecor moved outside of its home market of Quebec and started to become a near-national wireless player through the acquisition of Freedom Mobile after the big Rogers and Shaw transaction. So Hugues, thanks very much for joining us this afternoon for this conversation.
HUGUES SIMARD: My pleasure, Vince. This is my first podcast, so I'm excited about this and thanks for inviting me.
VINCE VALENTINI: First, I just want to get your thoughts on the state of the growth in the wireless market in Canada. We obviously saw some record levels of subscriber growth in 2022 and '23, part of that driven by big gains in immigration and population growth overall. A lot of people now think we're going to be slowing down meaningfully from those levels. We did hit 1.71 million subscribers in 2023.
The market so far this year is down 6% year over year through the first nine months. So really not that far off the record pace from last year. But I think a lot of people are expecting it to slow down even further. What are your thoughts on the overall state of growth in the wireless market relative to population? Can this market sustain one million or more sub-adds per year?
HUGUES SIMARD: Well, Vince, as you know, there are a few puts and takes in terms of market growth going forward. There's been a lot of talk and a lot in the media about the government's initiatives to curb immigration and foreign students. And as you know, these are groups that are important contributors, I would say, to the growth of the wireless market.
So I think we're starting to see the impact of certain of these changes or these government initiatives. So I have a hard time, really, answering. I'll be honest, we certainly, from Freedom and Videotron's standpoint, have not seen yet a significant impact on our momentum. That being said, I think it'd be foolish to think that there won't be an impact.
I mean, we are clearly, especially Freedom, as you know, is very much targeted, is performing very well, and comparatively very well, on immigrants, first-time buyers, foreign students as well, who are getting a wireless package for a few months or a few years. Is it really-- is it going to have an impact? I think it probably-- we think it probably will, but we're not sure. It's going to be as significant as some naysayers have been making it, to be honest.
I think certain other situations or phenomena are also continuing. People are getting-- increasingly, people are getting more than one phone or more than one line. Increasingly, teenagers and kids are getting phones younger. So certain of these situations are, in our view, not only going to continue, but they will most probably accelerate.
So the market is good, is growing. Is it going to be a little bit lower than what we've seen? Yeah. That certainly would be, I think, the realistic or the conservative approach. But we're confident at Freedom, because for example, when I talked about immigration, that's probably going to be a little bit lower. Yes, Freedom is definitely-- that's a prime target market for Freedom.
But on the other side, you will know, Vince, that Videotron has historically, and still continuing, to do very, very poorly with immigrants. So all in all, are we, at Freedom plus Videotron plus Fizz, going to be able to maintain the momentum? We think so. But I think it would be-- to answer your question, I think it would be realistic to think that there'll be, perhaps, a continued small decrease going forward.
VINCE VALENTINI: Great. Maybe I'd just double-click on one part of your answer to make sure it's clear. Second phone lines, younger people getting phones, effectively, that manifests itself as penetration in the wireless market in Canada should continue to grow. So not all of the gains have been coming from population, in your view. There's good penetration, and that should continue.
HUGUES SIMARD: Yeah. I mean, we're seeing it-- we're seeing it in Quebec, for sure. As you know, Quebec has always been lagging a little bit in terms of penetration, wireless penetration, and is starting to catch up a little bit. And we certainly expect penetration to continue to increase in Quebec. In West of Quebec as well, we think that these situations that I talked about will continue as well.
So yeah, I think there's room for penetration to continue. Is it going to be-- is it going to fully make up for if there is a significant drop in immigration? I don't know. But honestly, we're not-- we think, certainly, from our standpoint, that our momentum, as I said, is pretty good. So possibly a little bit of a dent, but I wouldn't call that-- I wouldn't be as pessimistic as some other analysts have been, I think, so far.
VINCE VALENTINI: Excellent. Let's shift from the market growth to your own growth. And obviously, some of your growth is coming at the expense of the big three incumbents as your price points and improving service quality are taking some market share away. So when you think about the market growth plus what you're doing on share gains, how should we think about 352,000 sub-adds, which is what your company just achieved over the past 12 months, and you obviously just reported those results last week?
Is 352,000 a good level? Is that maybe even better than you thought you were doing, or is it still not quite where you think you need to be and want to be, or staying around 350 a pretty good and sustainable number?
HUGUES SIMARD: As you know, when we've talked about this before, we don't necessarily-- we don't manage in terms of a numbered objective in terms of net adds. I mean, quite simply, because we feel that it's tough for us to give ourselves, for example, a number, be it 350 or some other number, in annual net adds on the basis that we don't operate in a vacuum, of course, and it really depends on how competition is going to react to our various programs and initiatives.
And as you know, this level of competition has evolved over-- ever since we took over Freedom a little more than 18 months ago. So right now, for a few months, we have been in a competitive environment that I would qualify as more rational.
That being said, as we pointed out on our quarterly call last week, the incumbents are still fighting back, and now, they're fighting back with their third brands, with their so-called fighter brands, which don't have certain-- they don't have all of the various, maybe, supports that Freedom, being more on the level of their flanker brands, has.
But that being said, I mean, they're still being competitive. My point is that they're still-- on a price point level, they're still competing quite aggressively. So it really depends going forward. As we are trying to maintain momentum, we've always said that we still, until-- we are increasingly successful in changing that perception, changing Freedom's perception.
That used to be-- to be quite honest, when we bought Freedom, it was the cheap brand for people who were willing to put up with a substandard network. I mean, let's face it. And over the past 18 months, we've worked very hard on all fronts, not only in terms of network performance, that word coverage, customer service, client experience, sales channels, retail efficiency, et cetera, et cetera.
And then we feel we're in pretty good shape. And that's why we felt that, for example, for our back to school initiatives and our, even, Black Friday initiatives that we felt that it was warranted for us to be perhaps a little less disrupting, as you said from the beginning, or maybe a little bit less aggressive and see how competition was going to answer.
So all of that to say that it's tough to-- I mean, 350 is-- I mean, we're certainly comfortable with our performance right now, in the balance in our performance between momentum, between net as loading and on the other side margin, margin stability and a little bit of growth, which we feel, at this point of the cycle, is probably the right balance for us. But that doesn't necessarily mean it's the right balance going forward.
So it will be important to see, for example, how Black Friday month, or a few weeks that are ahead of us, how that goes. And end of year is also an important period for us. And then we'll see, at the beginning of the year, where we're at. But we're certainly comfortable with our current balance between loading and margin. Yes.
VINCE VALENTINI: Now, I know you don't disclose your subscribers by brand. You obviously have three brands, Videotron and Fizz in Quebec and Freedom and Fizz outside of Quebec. But generally speaking, is it fair to say that even though you got a little less disruptive or a little less aggressive during back to school and over the past two or three months in general, that it didn't hurt your momentum outside of Quebec?
Where you were seeing strength for Freedom previously, you still saw it even after the slightly less aggressive tone in your pricing and promotions, as opposed to the 350 being dominated by the Videotron brand in Quebec. I assume that is not the case.
HUGUES SIMARD: That's right. Yeah, what you said is right. And it was, in our view, the sign or the testament that our plan that we had outlined quite clearly when we bought Freedom to say, certainly at the beginning, and for a period of time, that period of time obviously needing to be defined as we went along, we will have to rely on a price advantage-- on a higher price advantage at first, but hopefully, and if everything goes according to plan, a price advantage that will decrease over time.
And we're seeing that's exactly what seems to be happening. So I think it shows that we're doing the right thing in terms of all the things I talked about a few minutes ago, whether it's network performance or coverage, which was, by the way, by far the biggest complaint and the biggest pain point that we had identified with the Freedom subscribers when we took over, or reason for churn, which was very high, which remains elevated in our-- and I'm talking about Freedom now-- in our view.
But that keeps decreasing quarter after quarter. So we're clearly on the right track. So yeah, I mean, I would agree with your characterization that as we had planned and hoped that it would happen, that I think we're in a position to be focusing increasingly more on margin and increasingly less, if there's such a way to say things in English, on price advantage.
VINCE VALENTINI: So let's turn that to ARPU and what it could mean for your own company and maybe some implications for the industry. Obviously, your sub-adds are great, your volume was strong. Some people think that minus 6% for ARPU is suboptimal and could be better. By some people, I think you know I'm referring to myself.
Is there some hope that these actions you're taking to be a bit less disruptive can translate into better ARPU growth in the next few quarters, and perhaps stabilizing where you are as opposed to continued declines? I'll keep that as a shorter-term question first. I may have a longer-term follow-up.
HUGUES SIMARD: Well, yes. On the basis of what you just said, yes. That makes sense. And that's what we're working on. I mean, it is the normal, how would I say, path, that we're obviously trying to keep the momentum and signing up customers and then trying to move them up scale through roaming packages, whether it's roaming beyond or other functionalities, or more data that they will eventually need.
So that clearly is the intent and is the plan. That being said, there are other things at play here, as you know, on ARPU, and the fact that we have three brands. And the dilution effect of Fizz and Freedom versus Videotron will abate, will get better over time, but they will not go away instantly, as you know.
So even though I agree with the first part of your-- the hypothesis or the premise behind your question that it makes sense for us to be looking at ARPUs that would, from a Freedom standpoint, stabilize at some point, and then even grow at some point in the future. But don't forget that for a while, that dilutive effect of the other brands that are loading quite nicely is just-- mathematically, will keep the pressure on ARPU.
So it really should-- where I agree with you that it certainly-- and we're doing everything we can, obviously, so that the ARPU doesn't continue to drop at 6%. And it's been a couple of quarters at 6%. So all of these forces that we've talked about should lead us to reducing that decrease.
But I think it would be unrealistic of us to think that, short-term, there'll be sort of a-- yes, some of the repricing effect should be behind us. Most of the repricing effect in our case should be behind us. But the dilutive effect should continue for a while. So maybe the short answer would have been an improved performance in terms of lower decreases going forward.
VINCE VALENTINI: And thinking longer-term, am I right to say that Videotron in Quebec started with a material price discount, but over a decade, gradually became viewed as a quality brand and just as good as the incumbents who had been there for a long time, so you're not using price, necessarily, as the lever in Quebec anymore?
Is it the same philosophy in the rest of Canada, that for a while, Freedom has to-- and Fizz have to use a bit more price, but you can evolve to better pricing and less of a discount versus the big three incumbents over the course of three, four, five years?
HUGUES SIMARD: Absolutely. Absolutely. As you know, there were two things. When we took over Freedom, we took over Freedom, we bought Freedom on the basis that we felt that there was an opportunity for us to gain short-term momentum and short-term loading and market share on the basis that prices were unusually high in English Canada compared to-- well, compared to Quebec, compared to the US, compared to-- certainly compared to Europe, but that's another discussion.
So we were very clear that in the short-term, we were going to take a lower price approach. But I think we were also quite transparent that we were, in many ways, following the recipe with which we were quite successful in our home base of Quebec. Of course, there are differences, and of course, we don't have a wireline network in the rest of Canada, et cetera, et cetera.
But still, I think it makes sense that we would. And as we kept referring to that, the relaunch of the Freedom brand, that we kept-- as you remember, we had asked ourselves, should we keep the Freedom brand or should we introduce-- or should we rebrand? And the levels of awareness of Freedom were so high that we felt that it was better for us to have that fight and to rebuild the brand on the basis that a lot of people knew it.
Yes, a lot of people had a negative impression of it, or a negative take on it. But we knew that-- or we felt that we could be successful in changing that. And I think we have been changing this in a very short-term time since we bought.
And as that continues over time, it would make sense for us to, as I said earlier, not to have to rely on such a high price difference. And eventually, as we are repositioning Fizz and more successful in moving our clients and our customers upscale, as I said, then not to have to rely, eventually.
It's always the definition of that "eventually." But what does eventually mean? Is it a few months or a few years? I mean, these things are hard to-- are impossible to tell. But definitely, directionally, that is the plan. Yes.
VINCE VALENTINI: Leveraging that word "directionally," let me throw a couple of my forecasts at you, because I know you guys don't like to provide guidance, and certainly not multiyear guidance that is arguably tough to predict. But I've published that looking at the trends you have and the market positioning that Freedom has, you should be able to get to 6 million subscribers by the end of 2029.
And you should have an ARPU that's not quite $40, but much closer to $40 than the $35 or $36 that you're at today. And remember, that's four, five years out. Do those kind of numbers seem plausible if everything goes right in your business plan?
HUGUES SIMARD: Yes. I mean, they're not implausible. As you pointed out, he will still find me reluctant to-- if I do a quick math where we just announce our fourth million subscriber, not too long ago. I think we're at 4,075,000 as of last week or something like that. So that would mean that the numbers you just threw at me would mean adding 2 million customers in the next five years.
So if you divide 2 million-- and that's 400,000 a year, which is not an insignificant-- it's not a silly one. It's not an impossible one. Yeah, I think he-- Vince, you'd have to agree that it's a fairly high number. That's higher than what we've done before.
Of course, churn is improving. Churn was unusually and unacceptably high, and is coming down quickly. But still, I think-- so maybe my answer should be that it certainly is not implausible. But it is a-- I think your numbers are aggressive. Yes.
VINCE VALENTINI: That's fair. I appreciate the color. Let me make sure-- you mentioned CapEx earlier, and other initiatives you've taken to improve the customer satisfaction and image of Freedom. Can we switch that to a regional basis? Alberta and BC continue to be pretty small in terms of market share versus what you've achieved in Ontario. When and how do you think that can change?
Is there a lot more CapEx that needs to be spent in those markets on the network, or is there more retail distribution that has to be put in place, or is there simply more advertising to make the brand better known? I guess that's two questions. What do you need to do and when do you think that will start to happen?
HUGUES SIMARD: Well, all of the above, Vince. I mean, you know the business very well, and you've identified the very points that were-- the very initiatives that we're working on as far as the West is concerned. As you know, we didn't have unlimited supply of capital, and we wanted to be disciplined in our relaunch of Freedom. So we decided, for all the right reasons, I believe, based on volume and market sizes, that we would initially tilt our investments a little bit more.
And investments, I mean, everything you've talked about. I mean network improvements, of course, and network CapEx, but also branding and advertising investments, as well as the optimization of retail networks, as well as the development of sales channels, et cetera, et cetera. So all of these investments.
We were, quite honestly, a little bit more focused on Ontario because it was the market where we felt we could have more of an immediate impact to get us because it was, in our view-- and I think the numbers and the facts are proving us right, that it was important for us as, we were relaunching this brand, it was important for us to give ourselves good momentum from the get-go. And we felt that tipping things a little bit more towards Ontario was probably the right decision, and I think it turned out to be the right one.
That being said, as you pointed out, our growth in the West needs to be improved. And so now, we need to continue on our plan. And it's not necessarily investing more. It is continuing to invest, in our view, at the rate that we have been investing for the past few quarters. But spending a little bit more time and spending more-- or allocating a little bit more of those investments out West in all of the above.
I mean, the network, we know that we have specific, perhaps, a little bit more issues, specific issues, that we know of out West in the Vancouver area and some other areas out West as well that we need to be-- that we're focused on, but we need to resolve going forward. And we have a plan, and we will. As well as branding, as your point is well-taken, that we felt-- we feel, at this point, that we have not perhaps been as aggressive as we should have been, for reasons.
As I said, it's always that balance of profitability and market share momentum that we need to balance going forward. So we need to keep at it, basically. I don't think it's a-- there's no negative feedback in any way that we're getting from the West, in the sense that Freedom is resonating just as well in the West as it is in Ontario. But we just haven't been as aggressive in our investments out there. And we need to correct that or tweak that going forward.
VINCE VALENTINI: Final topic, CapEx and infrastructure. You mentioned some network investments a few times already. Can we take that up to big-picture total CapEx spending? Some people obviously argue that your spending is too low and approximately $600 million for your total telecom segment this year needs to be meaningfully higher.
Can you level set-- is there going to be some increase in CapEx over the next couple of years? And when you think increase, you're talking $600 going to $700, or does it have to go to $800 or $900 million at some point to build out cell sites and deploy spectrum and build out your MVNO regions and anything else you have to do on your cable network?
HUGUES SIMARD: We have started this. I mean, as we've said in the past, yes, there will be an increase. We never shied away from the fact that-- we felt we were efficient. Some people said we didn't invest enough. We felt that we were investing at the right level and just being comparatively a little bit more efficient than some of our competitors and getting more bang from our investments.
But that being said, we never shied away from the fact that, yes, with Freedom, it was important for us to continue to invest in the network in terms of coverage, whether-- there are more than 100 sites that will be added over the next couple of quarters or a few quarters going forward. So yes, our CapEx and density will continue to increase, as it has increased this year already compared to last year.
But as I've said in the past, Vince, we don't anticipate any significant step function. We see our investments as growing gradually over the next few years. And that $600, which will probably-- and that's the guidance we had given for this year, which will probably-- as a matter of fact, will probably be a little bit higher than that.
And that should grow as well for 2025. And we'll give guidance, perhaps, for the next couple of months. But it shouldn't be a huge step function. It should be a natural, continued increase from 2023 to 2024 to 2025, and probably going forward as well, as we are turning on that 3,500 and 3,800 spectrum and adding hundreds of sites, as I've mentioned throughout, from Ontario all the way to BC.
VINCE VALENTINI: And last, just on infrastructure, we've seen some of your peers talk a lot more and even start to execute on some deals to monetize certain portions of their network infrastructure. Is this something that is on the radar for Quebecor as well, or do you feel like your balance sheet is in a position where you don't have to start to consider that type of financial engineering?
HUGUES SIMARD: My first comment, Vince, is exactly what you've just said, your last words. We honestly see these infrastructure deals as financial engineering. We feel, at this point-- and what I'm about to say, obviously, will evolve over time. But we certainly see, at this point, that our balance sheet is pretty solid. Our cash flow generation remains very strong.
We're very close to where we want to be in terms of leverage. And we've said to the market and to our credit agencies that low threes is the sweet spot where we feel we're comfortable in operating. And we're almost there. There's still a little bit more deleveraging that needs to happen over the next couple of quarters.
But after that, at this point, it just seems to us, to be quite honest-- and we haven't, perhaps, spent the time to understand these financial engineering deals, perhaps, as well as I should have. But at this point, it still looks to me that it's not going to lower. If anything, it'll increase my cost of capital.
So at this point, I'd say that we certainly don't feel the urge or the need for us to consider these things. But that being said, I think it'd be silly of us not to look into it and to dig a little bit deeper, which we will certainly be doing for the next little while.
VINCE VALENTINI: Well, Hugues, it's been a very interesting time in the Canadian telecom, and especially the wireless market. So I greatly appreciate you spending the time to share your insights with us to try to unpack some of these dynamic trends. So thanks very much for your participation.
HUGUES SIMARD: Well, thank you, Vince. And it has been interesting, and if I may be so bold as saying, I think it will continue to be interesting. I think the dynamics are evolving, as you pointed out yourself, from a market reaction when we-- an immediate market reaction when we bought Freedom. And I think things will continue to evolve in the right way going forward.
And it's a good market. And there are a lot of people out there calling all the potential risks. Yeah, there's always risk in business. But wireless, we see people getting these devices, as I said, from a younger and younger age, people using them even more, usage going up, and the number of functionalities, number of things you can do on your wireless device, keeps increasing.
So this is the future. It clearly is the future for us, and we're very enthusiastic and optimistic about the state of the market in Canada at this point.
VINCE VALENTINI: Yeah. And thanks very much.
SPEAKER: Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.
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