Gearing up for 3G

Charles Hoffman, CEO of Rogers Wireless Communications, Canada's largest mobile phone operator, believes that by swiftly embracing GSM technology he can leapfrog his rivals. Facing intense competition from the other three national carriers — Bell Mobility, Telus Mobility (which last year gobbled up Clearnet Communications) and Microcell Telecommunications — Hoffman believes Rogers can distance itself from the pack by getting the jump in deploying its third-generation network.

“Microcell will likely launch first, but given its limited footprint it's not going to have much of an impact. However, we're going to have a much greater lead over our CDMA rivals Bell and Telus,” he says.

Operating under the brand name Rogers AT&T Wireless, the company announced late last year that it would upgrade its network with GSM technology used extensively in most parts of the world except Canada and the U.S. Rogers is going to invest about $195 million during the next three years to overlay GSM/general packet data services (GPRS) technology across its existing TDMA digital network, cutting the cost of a ground-up buildout by at least 25%. For the 3G rollout, it has also plunked down about $255.7 million for 23 new spectrum licenses from Ottawa.

Starting this July, Rogers expects to be ready with its “always-on” GPRS wireless packet data service, along with GSM digital voice service for a variety of integrated handsets. GPRS technology expects to enable data speeds over mobile phones of up to 115 kb/s — 10 times faster than current GSM networks and up to four times faster than wireline local-loop telephone networks.

It must be consoling to Rogers that it won't be journeying alone. Rather, the company will be moving in lockstep with a key partner — AT&T Wireless Services — in making the GSM transition. Both companies on the same day announced nearly identical GSM rollouts for their respective territories.

AT&T of New York holds a 16.6% equity stake in Rogers Wireless Communications. Meanwhile, BT, a GSM adoptee from Day 1, also has a 16.6% minority holding in the Canadian carrier. Control of Rogers Wireless, of course, is held by Canadian business mogul Ted Rogers, whose Rogers Communications has a 51% share in the wireless unit.

“Going GSM for Rogers was a no-brainer. Once AT&T decided to move in that direction, it was clear its Canadian affiliate would follow,” says Adam Guy, a senior analyst with the Strategis Group.

Charles Hoffman, a former Sprint PCS exec who joined Rogers in 1998, agrees that it makes ample sense to hitch a ride with AT&T. “With a country this size, you just can't be off on your own. Every cost from handsets to infrastructure development is affected by the economies of scale,” says Hoffman.

Gravitating to GSM means Rogers' 2.9 million subscribers gain roaming privileges in 150 countries. All told, GSM commands more than 440 million worldwide subscribers, while TDMA previously used by Rogers and CDMA used by Bell Mobility and Telus Mobility have only 100 million subscribers.

Iain Grant, managing director of The Yankee Group Canada, says Rogers and AT&T have finally conceded they've lost the technology battle with Europe, which has standardized solely on the GSM protocol. “It's a marvelous business decision to adopt, but I wonder why it took these two so long to get there,” he says.

The timetable for Rogers AT&T Wireless' journey to 3G services is ambitious. It expects to provide GSM digital voice and services and GPRS for 83% of Canada's population by the end of 2001, and for 93% by the end of 2002. During 2002, it plans to boost packet data speeds to 384 kb/s from 115 kb/s. In 2003, the carrier is going to deploy universal mobile telecommunications system (UMTS) technology in the top 25 markets in the country. Its new network will be built by Ericsson Canada, which won the tender against Nortel Networks, Nokia and Lucent Technologies.

“The GSM-GPRS-EDGE-UMTS overlay will be accomplished at a cost close to our original expectation, and that is about $10 a pop [potential customer],” says Robert Berner, senior vice president and chief technology officer for Rogers AT&T Wireless. “This will be possible because of the economies of scale as well as the strong network equipment partners.”

Certainly, the carrier can ill afford costly overruns. Its stock is languishing, and its deficit is growing. In 2000, Rogers recorded sales of about $974.7 million but registered a loss of about $46.6 million compared with a loss of about $23.3 million in 1999. It experienced a record 166,000-client defection in the three months ended Dec. 31, while at the same time it gained a record 350,000 new subscribers — a paradox not too unusual in PCS economics.

“Churn is our number one priority for 2001. But you have to remember the number of people leaving us was higher because of our very strong customer base,” says Nadir Mohamed, company president and chief operating officer.

Rogers' churn rate is about 2.36%, a number that reflects the billing woes plaguing the carrier. Rogers has spent $130 million during the past two years on OSS work, outsourcing a new billing system to Amdocs. “Our work is now completed, and we're going to enhance our bundling options,” says Mohamed.

For its part, Telus Mobility still has to bring all the Clearnet subscribers under one central billing platform. Meanwhile, Bell Mobility declared it's going to amalgamate nine different billing plans in one unified system — a painstaking process that's likely to take a few years based on the Rogers experience.

On one billing issue, however, the industry is clear: It's on the books for $961.8 million payable to Ottawa for 62 new wireless licenses following Industry Canada's spectrum auction completed in February. Rogers and Bell Mobility were the two biggest spenders. Bell Mobility forked out $467.9 million for 20 licenses, mainly in Toronto, Montreal and key markets in Alberta and British Columbia, while Rogers paid $255.7 million for 23 licenses across Canada. Telus was the third-highest bidder, spending nearly $231.3 million for just five new wireless licenses in Eastern Canada. The fourth incumbent, Microcell, came up empty, withdrawing in the early rounds.

The average price for the new frequencies was relatively cheap compared with recent auction action in the U.S. “We actually got double what we hoped for, and we're now set at least through 2007,” says Hoffman. Rogers, supported by BT veterans of the European bidding wars, expected to pay up to $1 billion. All told, Hoffman expected Ottawa to fetch perhaps $1.6 to $2 billion for the licenses.

Thanks to Sprint's early retreat, the bidding was largely contained among the established fraternity. Only one new competitor, W2N of Montreal, emerged with licenses, although the company starts as a regional player.

Payment for the new Rogers AT&T Wireless licenses will be split between Rogers and its American partner — not quite on a prorated basis. Rogers Communications will pony up 60% of the costs with AT&T funding the remaining 40%. On this one, equity partner BT is staying on the sidelines. Rogers AT&T Wireless is considering tapping the equity markets for additional funds, but that could be a tough sell. Rogers' shares have plunged to as low as $10.72 a share during the past year, down from $37.25. “Until our investors see a great first quarter — and I anticipate that's going to be the case — our stock price will likely stay the way it is,” says Hoffman.

There's no denying that mega-carriers like AT&T, BT, Verizon and SBC Communications — each having minority interests in Canadian wireless carriers — would prefer to have more sway over their investments. That is if and when the federal government scraps foreign ownership restrictions that limit non-Canadian companies from owning more than 33% of a domestic telecom firm. The big boys under the auspices of the World Trading Association have been lobbying Ottawa to relax the telecom regulations. Would Rogers Wireless Communications let AT&T Wireless call the shots if the rulebook is thrown out?

“Ted Rogers has never gone with less than 50% ownership before,” says The Yankee Group's Grant. “But to take the name Cantel and throw it away as he did was an enormous step in that direction.” Two years ago, when AT&T and BT pumped in almost $910 million into the then-sagging fortunes of Rogers Wireless, the brand name was changed to reflect AT&T's growing influence.

Hoffman sees a liberalization of the ownership rules sometime soon but not to the extent that majority control would be ceded to a non-Canadian entity. “The industry is too darn expensive to do it all on your own. There's global consolidation going on everywhere. When Ottawa relaxes the ownership rules, we'll see consolidation here as well,” says Hoffman, who believes that at best only 49% of a Canadian telco could be held in foreign hands.

To the chagrin of the industry here, Canada lags behind the U.S. and Europe in penetration rates. So far about 26% of the population has gone wireless. Next year, the pundits figure the penetration will climb to 30%. Hoffman predicts the total will swell to as much as 60% or 70% in five years due to pent-up demand for faster data access.

To that end, Rogers is currently targeting the instant messaging crowd. It recently signed a deal with AOL Canada Services, wherein Rogers customers could get AOL's content through their mobile phones. It's contemplating similar arrangements with other messaging providers such as ICQ, MSN and Yahoo.

Rogers was an early convert to Research In Motion's popular BlackBerry PDA. More than 10,000 subscribers in the first seven months have been converted to the joys of getting e-mail while on the go. “With GPRS, we're going to get BlackBerry performance on all types of devices because of the always on packet data capabilities,” says David Neale, Toronto-based vice president of product development for Rogers.

Neale expects GPRS handhelds costing about $390 and up will start cropping up by summer. First adopters, he believes, will be corporations wanting to extend their enterprise systems through their Palms, Pocket PCs and GSM phones, enabling managers to tap into customer relations databases and sales-automation tools and to check inventories on the fly.

At this stage, data revenues are not even on the radar screen for Rogers. More than 99% of its income comes from voice. But Hoffman anticipates that data will match voice revenues by 2006. “We're going to make tremendous inroads. We're stealing all of this technology from AT&T Wireless and AT&T DoCoMo, proven applications that people want to buy,” he says.

Chris Potter, a research associate with The Convergence Group of Toronto, says the GSM-GPRS shift will mean Rogers gets up to speed on data a year earlier than previously planned. “Rogers only just introduced a mobile browser service and is trying to catch Bell Mobility, which has been developing rudimentary data applications for almost two years,” says Potter.

Be it data or voice, Rogers' average monthly revenue hovers around $32.40 per subscriber, in contrast to a healthier $68 figure for AT&T Wireless. “Sure we would see profits very quickly if our monthly ARPU got up to $68,” suggests Hoffman.

When will Rogers be profitable? Not overnight given the protracted rate wars being fought in Canada. Bell Mobility has been the discount leader, but all the carriers have taken turns raiding each others best corporate customers.

“You just can't keep giving away the service like Bell has been doing,” says Hoffman. “Rest assured, we'll be the first carrier in Canada to be profitable. But that may take a while,” he says. It remains to be seen if that's before or after 3G is in full swing.

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Andrew Tausz is a freelance writer based in Toronto. His e-mail address is mr.a.tausz@home.com.

Rogers AT&T Wireless

• Headquarters: Montreal, Quebec; Executive Offices: Toronto, Ontario

• Top officers:

  Charles E. Hoffman, CEO

  Nadir H. Mohamed, president and chief operating officer

  John R. Gossling, senior vice president and chief financial officer

  Robert F. (Bob) Berner, senior vice president and chief technology officer

  Paul W. Nelson, vice president of information technology and chief information officer

• Number of employees: 3200

• Date founded: 1983

• Focus: Rogers Wireless operates under the co-brand Rogers AT&T Wireless and is Canada's largest wireless communications service provider with over 2.9 million customers and offices in Canadian cities from coast to coast.

• Stock high/low: $37.25/$10.72

• Date of IPO: Originally incorporated April 1983

• Annual revenue in 2000: $1,532,063