Bell Canada - an Economic Analysis

Bell Canada: An Economic Analysis

MGCR 293 | Managerial Economics | Section 003

November 21, 2016

Introduction

The telecommunications industry has been playing a crucial role in the information society. We can think of it as the world's biggest machine. Strung together by complex networks, telephones, mobile phones and internet-linked PCs, the global system touches nearly all of us. It allows us to speak, share thoughts and do business with nearly anyone, regardless of where in the world they might be. Telecom operating companies make all this happen (“The Industry Handbook”, 2004). And one of them, Bell Canada, is the focus of this paper. Founded in 1880 and named after Alexander Graham Bell, the inventor of telephone, Bell is one of the most powerful telecom companies with the richest history in Canada. Today, Bell serves over 21.1 million customers and generates 21.5 billion of revenue through its various telecom services and solutions (“Leading the way in communications”, 2016). These include mobile and residential phone services, internet, home and mobile television, broadband communication technology and connectivity equipment.

Although telecommunications industry has shown steady growth over the last five years, both in terms of subscribers and revenue, it is not easy for Bell to maintain its market power. With growing demand comes growing number of competitors, and thus more substitutes have come into play, threatening Bell’s market share and revenue. This paper will look into Bell Canada’s role in the Canadian telecom industry and how it maintains its success. We will first look at the trend of the market demand in the industry, followed by an analysis of the overall market structure. Next we will discuss Bell’s pricing strategies, and finally how Bell increases its net income.

Problem Analysis

Question 1: What is the trend of demand for Canadian telecommunications industry?

The telecommunication industry in Canada is facing an increasing growth in revenue in recent years. The output of the whole telecom service industry in 2015 was $47.8 billion (see Appendix A for the revenue of the telecommunication industry), with an increase of 4.1% comparing with last year, while the increase rate in 2014 and 2013 was 2.5% and 2.1% respectively. The increasing annual growth rate of revenue in telecommunication industry indicates that there is an incremental demand for the telecom service in Canada in the following fields.

First and foremost, Canadians are in greater needs of faster and more reliable Internet with better download capability. The Internet sales takes up 21% in the total revenue in telecommunications in 2015, more than the proportion in 2013 (19%) and 2014 (20%) (see Appendix B for the distribution information). In addition, Canadians have incremental demands for wireless telecommunications like cellular telephones, satellite television, and wireless network in digital era. The revenues generated from wireless telecommunication in 2015 was 23.6 billion (see Appendix C for the revenue of the wireless telecommunication industry), accounting for half of the total revenue in telecom industry.

Despite the fact that the revenue in telecom industry is increasing steadily, the industry’s performance is negatively affected by the declining use of some market sectors. Firstly, the industry has been remarkably impacted by the decrease in long distance and local wireline telecommunications, with long distance declining by 14% and local wireline declining by 4% in 2015 (see Appendix D for the long distance and local wireline information). This circumstance is owing to the fact that people are using wireless networking and Internet as inexpensive and flexible alternatives to phone calls when people contact with each other. Another problem is the declining use of paid-TV service. Eight main telecom companies combined has a $113,705 net loss in subscribers (see Appendix E for the net subscriber addition/loss), implying that more people are watching videos online instead of purchasing paid-TV service.

Generally speaking, the telecom industry remains strong financially, with the pre-tax profits estimated to reach $7.9 billion in 2016 (“Canada’s telecommunication industry to see limited growth”, 2016). This industry has a steadily rising demand in Internet and wireless service with the development of technology, while it also faces challenges in decreasing demands for long distance and local wireline, and paid-TV. Impacted by these challenges, this industry is still highly profitable because the customers are switching a portion of what they used to spend on TV and wireline service to Internet and wireless network expenses.

Question 2: What is the market structure of Canadian telecommunications industry?

The Canadian telecommunication industry is almost matured (e.g. a 1.5% growth in wireless subscribers between Q2 and Q3 of 2016) (The Canadian Wireless Telecommunications Association, 2016). Also, the industry is an oligopoly dominated by five largest telecom groups which in total accounted for more than 84% of market revenues (Canadian Radio-television and Telecommunications Commission, 2015). Bell, therefore, is combating in a tight game where it is fairly competent but admittedly not the only major player. The most pragmatic winning strategy is to maintain its current position while absorbing market shares and customers from rival companies.

Among Bell’s most significant competitors are Rogers, TELUS, MTS Inc., and Shaw. Combined, including their affiliates, these five companies, although small in number, made up 84% of total market revenues (see Appendix F for specific data). Moreover, they are involved in most of the business sectors that Bell is currently operating in, namely, wireline, wireless, TV, and media. Those companies are large facilities-based providers that own the required equipment for telecommunications services, meaning they can both operate on their own and can provide services to smaller reseller companies, making the competition landscape to be more disadvantageous for Bell.

In the telecom industry, barriers to entry are high predominantly due to economies of scale, smaller players do not have the access to expensive and complex technological infrastructures. For instance, Large players could use antenna sites as an effective barrier to entry and competition by excluding smaller business from getting access to it, or by charging them especially high prices. Another example would be that smaller providers could not negotiate as equals with large players which leads