Microcell maintains marketing moxie

Much to the chagrin of the Canadian wireless fraternity, Microcell Telecommunications of Montreal is a particularly pesky competitor. The service provider usually is the instigator of ongoing price cuts that the other four national wireless players must follow - sooner or later.

In September 1999, for instance, Microcell - known to consumers for its Fido brand digital PCS offering - doubled the number of minutes available to subscribers at about $13.

In effect, its subscribers could buy 200 minutes at 7cents per minute. At the 400 minute-per-month level, Microcell had the audacity to let users bank unused minutes and carry them into the next month - radical stuff for Canada. In the meantime, Microcell decided to reduce the price of its prepaid Fidomatic service by nearly half.

Not surprisingly, the other major entrants on the Canadian landscape - Bell Mobility, Clearnet Communications, Rogers AT&T Wireless and Telus Mobility - have scrambled to respond to Microcell's discount tactics. Churn in the industry is endemic under the best conditions; it's even worse when a key provider makes such bold moves.

Give away the blades

But Microcell isn't just interested in low-priced minutes. Its cut rates are part of the company's strategic business plan.

"It's not the price per minute that matters, but it's the revenue per month per subscriber that counts," says Andre Tremblay, president and CEO of Microcell. "We could sell some of those minutes at [34cents] a minute, but we wouldn't make a successful business case. First, get people to use the product so it becomes part of their life. Then you can sell the value-added services such as voice mail, caller ID, fax messaging and wireless banking."

Sound advice. But Canada already has among the most affordable wireless rates in the world, according to a recent study by The Yankee Group. The wireless industry accounts for roughly 15% of the approximately $15.3 billion Canadian telecommunications market. Thanks to Tremblay's shenanigans, Canadian rate plans are lower now than a year ago.

"Unfortunately, Microcell tends to lead in price reductions. But it's all aimed at low-end users. To upsell later is a nice philosophy, but it doesn't always work," says arch-rival Charles Hoffman, president of Rogers AT&T Wireless.

Since Microcell launched service in 1997, it has been an innovative and aggressive combatant. During the past three years, the company has gained a digital subscriber base of 584,487 and wrested an 8.8% share of the Canadian wireless scene.

"Microcell has created quite a splash," says George Karidis, director of research and consulting at The Yankee Group of Canada. "No doubt, its sharp pricing and strong branding have helped stimulate the use of cell phones. The meter has stopped ticking for many people."

But the growing market presence has come at a steep price. Microcell's revenue for fiscal 1999 was approximately $154.5 million, with an operating loss of $180.4 million.

"The important point is that we added more than 302,000 new subscribers last year with Fido, and that's more than double the number we had at the end of 1998. We were very pleased with our operating results, which exceeded all expectations," says Tremblay, who expects Microcell to inch into a positive EBITDA position next year.

The wireless incumbents, as expected, have significantly larger user bases. Telus has 1.1 million subscribers, and Bell Mobility has 1.8 million subscribers. The recent unraveling of the Stentor alliance of telephone companies (the provincial Bell entities) - and the intense east-west rivalry that has been unleashed - mean that Telus and Bell Mobility will introduce competition for wireless customers. Both players will be in the other's territories, possibly by this summer.

Rogers AT&T Wireless leads the subscriber ranks with 2.15 million users. AT&T and BT announced they were taking a 33% ownership stake in Rogers, giving the wireless carrier debt relief and strong backing for the development of next generation wireless service.

Newcomer Clearnet, which also received a national wireless license in 1997, has a comparable subscriber base to Microcell (about 560,000 digital subscribers at the end of 1999). But Clearnet is running two networks: a PCS network for consumers, and a digital mobile radio system called Mike for commercial use. Clearnet can provide dispatch capabilities, similar to using a walkie-talkie, along its 745-mile telecom corridor from Montreal to Windsor.

"Clearnet and Microcell aren't in the game yet to make money," Karidis says. "They're positioning forfuture growth and future revenues. The incumbents all have positive cash flow. The good news is that industry penetration is expected to double to about 44% in the next five years, and the profit picture should improve for all the carriers."

Partners in time

In anticipation of fierce dogfights over the Canadian airwaves, Microcell recently allied itself with a stronger partner to the south. In February, Microcell sold a 15% equity stake to VoiceStream Wireless for approximately $266.8 million.

"The deal is more than just an equity stake. It's a strategic partnership to build a pan-North American network that will be very strong," Tremblay says.

Microcell and VoiceStream use GSM, enabling them to easily meld their networks. They also plan to jointly develop new high-speed data services.

The two carriers have had discussions as members of a GSM industry association for the past three years, but serious talks began about three months before the deal, Tremblay says.

With 675,000 wireless subscribers, VoiceStream gets two of the 11 seats on Microcell's board and the option of converting non-voting shares into a 22.6% voting stake. That would limit VoiceStream ownership about 10% below the cap on foreign holdings of Canadian telecommunications assets.

Will VoiceStream seek a controlling stake if and when Ottawa rolls back the rules on foreign ownership? "There's no path to control in the deal for them," Tremblay says. "John Stanton [chairman of VoiceStream] is investing in Microcell because he thinks it's a good investment. He may come one day with a different plan."

In the future, Microcell might become part of an "international play," though not necessarily by giving up control of the company, he says. "Rather, it's a matter of critical mass and seamless transfer of service not just across North America but throughout the globe," Tremblay says.

Indeed, the VoiceStream move coincides with growing consolidation in the telecom industry. VoiceStream has emerged as the largest GSM player in the U.S., following recent deals to merge with Omnipoint and Aerial Communications, giving it licenses in 23 of the 24 largest U.S. wireless markets.

The foreign ownership rules for Canadian telecommunications are facing increasing scrutiny. The World Trade Organization, spearheaded by the U.S., has been pressuring Ottawa to lower barriers to foreign investment. The Canadian federal government limits outside voting ownership in an operating division of a Canadian telecom company to no more than 20% (or 33.3% of voting ownership in a publicly traded telecom holding company).

"I don't think the rule book will be thrown out completely. But the regulations in Canada will likely be modified to ease foreign restrictions," says Dean Proctor, vice president of regulatory affairs at Microcell. "We're definitely in favor of liberalization."

On the operational front, the federal government recently lifted its four-year spectrum cap limiting the amount of radio spectrum each PCS provider may operate. Wireless carriers in Canada, hamstrung in certain regions of country because of capacity restraints, can now each use 55 MHz frequencies - an increase from 40 MHz.

Industry Canada, the federal ministry that regulates telecommunications, also will auction off 40 MHz of additional PCS spectrum this fall to foster growth in the wireless sector (see story on page 50). All the PCS incumbents are expected to bid for more licenses. The prevailing wisdom in this business is that you can never own too much spectrum. And given the telecom auction frenzy overseas, some analysts expect the Canadian bidding to top approximately $667 million.

"Sure the bidding could be expensive," Tremblay says. "But who could be better than us get in on the action? Look at our brand, assets, fantastic GSM network and solid partnerships. In this context, money should not be an impediment to our continuing success."

Marketing maneuvers

Tremblay's unique marketing campaign for the Fido service provides him with this confidence. He's taking a no-holds-barred approach to selling it (see sidebar on page 34).

Company officials won't reveal Fido's marketing budget. "But we spend more than Coca-Cola does in Canada. Coke's been around a longer time," says Fulvio Bussandri, president and chief operating officer of Microcell Solutions and former marketing guru with Coca-Cola.

Fido customers talk more than 250 minutes per month on average. With higher-end plans, about 70% subscribers buy into extra services such as caller ID; Fido Pro, a suite of wireless e-mail and messaging services; and Fido Data, which uses a wireless phone to connect to a PC or laptop.

Without a doubt, Fido has successfully attacked the consumer segment of the wireless market. The Yankee Group estimates that Fido's revenue split is 90% consumer and 10% business. The carrier has a strong presence in all areas of the country. No more so than in its home province of Quebec.

"Surprisingly, Quebec has the lowest penetration of wireless usage - just 17% - of any province in Canada. But the beauty is that we own the market," Bussandri says. In the fourth quarter of 1999, Microcell held 37% of the wireless share in Quebec.

The carrier has a novel approach when it comes to wholesaling. Its Microcell Connexions division is the only Canadian PCS operator to offer airtime in the form of unbundled, unbranded wireless services to companies that subsequently brand and bundle their own services.

"The margins are very good for wholesaling because we have very few additional costs," says Rajiv Pancholy, president and chief operating officer of Microcell Connexions. Last year, two new companies came on board for Microcell's wholesale offering: Norigen Communications provides bundled services targeted for small and medium-sized businesses; and Universal Paging Telecommunications is going after the Chinese-speaking market of Toronto with its branded offerings.

"Overall, Microcell Connexions has had relatively little success in the first round of wholesaling agreements. But as more CLECs pop on the scene, I think Microcell will pursue them more aggressively for better results," says John Riddell, an analyst with Angus TeleManagement Group.

Earlier this year, Microcell finalized its sale of an 80% interest in Saraide to InfoSpace for about 1.1 million InfoSpace shares. Tremblay has been an adamant supporter of Saraide, a wireless ISP spun off from Nortel Networks three years ago.

"The time was right for the sale. It's a tremendous deal," Tremblay said. Microcell originally invested approximately $4 million in Saraide and values it at approximately $267 million to $333.5 million, Tremblay says.

InfoSpace.com is combining its wireless services - allowing consumers, for instance, in Canada, the U.S., Japan and Europe to buy goods online using wireless phones - with Saraide's services. In the complex transaction, Microcell retains a 4.8% interest in the combined company. "If you look at InfoSpace and compare it with the market capitalization of Phone.com, it could be easily worth [around $6.7 billion]," Tremblay says.

Build for success

Tremblay's most pressing challenge, however, is not theoretical stock valuations: It's to build out his Canadian digital network and keep apace with the other carriers that are ahead with their pipelines. Microcell already has pumped in approximately $600 million for the Canadian GSM network, although Microcell's PCS channel serves only 53% of the Canadian population - the lowest of any of the major national wireless players. By contrast, Clearnet, which started operations six months later than Microcell, has 90% of the population covered.

"We now have close to [$667 million] in cash available and [about $267 million] coming in from VoiceStream," Tremblay says. That money is going to help finance Microcell's network expansion and upgrade to higher data speeds.

"Now with data services coming in - and I'm very keen on GPRS, which will give us speed at least 10 times what we have now on wireless handsets - it's going to open the market to a whole new range of people. It's conceivable that an AOL could come to us to get the data network to launch their own data phones," he says.

All the while, Tremblay remains cautious in his rollout. He points to the steel industry south of the border as an example of the deleterious effects when excessive supply outstrips customer demand. "At the end of the day, what you want to do and must do is avoid overbuilding," Tremblay says. "That would lead to a bad market reaction."

Andre Tremblay, 45, a former tax accountant and university professor, now president and CEO of Microcell Telecommunications, began a professional association with Quebec's telecom entrepreneur Charles Sirois in 1982. He soon became Sirois' right-hand man and helped steer Microcell's winning license bid for national PCS service in 1995.

"Charles Sirois has a very strong leadership style and major impact on this company. He's my partner, but he's really the big guy," Tremblay says.

Big guy indeed. Sirois' Telesystem International Wireless recently swooped into the British wireless phone market, winning a mobile operator's permit after an eight-week spectrum auction that netted about $36.5 billion for the U.K. treasury. The Canadian interloper's TIW unit, UMTS, tendered a winning bid of $7 billion in an auction format that's expected to be replicated throughout Europe.

Telecom czar Sirois' TIW operates wireless entities worldwide, and it's one of the dozens of entities that constitute his private holding company, Telesystem. In the scheme of things, Telesystem owns 31% of Microcell and also has controlling interest. Last February, Sirois sold his 8.9% stake in Teleglobe, the international network operator privatized by Ottawa, in 1988 to BCE (the owner of Bell Canada) for approximately $667 million. Even without Teleglobe, Sirois controls telecom assets estimated to be worth more than $4 billion.

Tremblay probably has experienced more ribbing over one decision than anything else since he's headed Microcell: calling his service Fido.

"A number of people said to me `you're crazy' to go with Fido. But did people in Silicon Valley ridicule Apple for being a computer manufacturer? The name is important only as long as fits with what you're trying to do. The idea is that Fido is the phone that follows you. It's a friend. Something that's part of your life," he says.

The name had to be short, catchy, and most important, recognizable in both official Canadian languages: English and French. Microcell's advertising agency, Bos, has focused on billboards and TV commercials where the owners looked remarkably canine-like beside their Fidos - dogs and phones. The ads won gold at the CASSIES advertising awards.

"We believe the personality of Fido has to be represented through the animal. It's been an evolution. The most recent commercials show greater interactivity between the dog and the human, now that we're pushing the value-added services such as text messaging, enhanced voice mail and our new voice-activated handsets," says Fulvio Bussandri, president and chief operating officer of Microcell Solutions, the company's wireless subsidiary.

It was almost a clean sweep. In March, Microcell Telecommunications and Look Communications - both part of Quebec telecom kingpin Charles Sirois' empire - captured 12 of the 13 regional licenses from Ottawa for a national broadband wireless service. Saskatchewan Telecommunications won the remaining license to offer services in that province.

The venture, to be called Inukshuk Internet, is owned equally by Microcell and wireless broadcast Internet company Look. Inukshuk plans to offer various services - Internet, data, voice and multimedia - based on a high-frequency technology known as multipoint communications system (MCS) in the 2500 MHz range.

"The Industry Canada licenses were a beauty contest, not an auction," says Andre Tremblay, president and CEO of Microcell and chairman of Inukshuk. "The cost is an annual fee that's very low, just a few million dollars a year. Once we build this network, though, we're committed to reselling spectrum to anyone who wants to use it."

Tremblay expects service to start next year, and one year after deployment, the company has to provide coverage to 50% of Canadian homes. "We're still waiting for some technological improvements. But we're confident it will work," he says.

Inukshuk takes its name from the rock cairns that the Inuit use as navigational beacons. In the Arctic, Tremblay has partnered with a large ISP called Nunanet. Part of his license win stipulates that Inukshuk will undertake various telelearning and telemedicine initiatives. Tremblay hopes to eventually provide digital and high-speed Internet access through the north and throughout Canada.

The license win beat competing bids from Bell Canada, BCT.Telus and Rogers AT&T Wireless. "The technology Inukshuk is using is line of sight. It's going to be extremely difficult and expensive to deploy," says Charles Hoffman, president of Rogers AT&T Wireless.

That may sound like sour grapes from a losing participant. But the Canadian federal government already has handed out three high-frequency microwave licenses in 1996 - one to WIC Connexus, one to RegionalVision (both owned by Western International Communications) and one to a consortium called MaxLink. None of the licensees is up and running yet, citing technical snafus.