Shaw kills wireless network plan

Shaw Communications Inc. (SJR.B-T) has killed off plans for a cellphone network, with company executives announcing on Thursday that the company instead plans to build out a WiFi network for its existing customers.

The move, which sees the Calgary-based cable giant duck out of one of the most lucrative growth areas in the sector, comes after numerous delays and the announcement of a strategic review of its wireless business. The company previously said it would begin offering wireless service for smart phones, like its cable peer Quebecor Inc.'s Vidéotron Ltée. in Quebec. Halifax-based cable company EastLink Communications has also announced plans for a cellphone network.

Shaw acquired wireless licences in 2008 along with other so-called new entrants, such as Wind Mobile, which have long since launched service. But Shaw has decided to focus instead on a WiFi, which runs on wireless spectrum that the company said are freely available.

"The economics of a conventional wireless business as a new entrant are extremely challenging," the company said in a news release on Thursday.

"New entrants lack the economies of scale and scope to compete effectively against well established incumbents with ubiquitous coverage, extensive device ecosystems, deep (wireless) spectrum (licence) positions and large retail networks. Even with our established base and considerable strengths and assets, we could not justify a wireless network build at this time."

The move to go with a WiFi network, which the company says will allow it to extend mobile broadband Internet services without incurring all the costs of a full wireless network build, will surely raise eyebrows in the sector. The company noted in its release that WiFi tablet computers represent the majority of those sold in the burgeoning market to date.

Wireless is by far the largest growth area in telecommunications today, as consumers abandon simple cellphones for more advanced smart phones and sign on to expensive data plans that bring in revenues that compensate for declines in other areas. Although the company is planning on filling industry analysts in on its plans in a conference call today, there will likely be concern that the company may miss out on a significant source of revenue - a source of revenue its western Canadian rival Telus Corp. has in spades.

But Shaw, a company famous for focusing on shareholder return (and notorious for large executive compensation), said it decided this route made the most sense in terms of creating long term value.

"We have decided to focus on strengthening our core business and leveraging our media and programming assets to support our leadership position in broadband and video," said Brad Shaw, Shaw's chief executive officer, alluding to Shaw's purchase last year of CanWest Global Communications Corp.'s broadcasting assets. "Our decision not to pursue a conventional wireless business is consistent with this strategic approach and our focus on shareholder value."

Dvai Ghose, an analyst with Canaccord Genuity, said Shaw's announcement was underwhelming and clearly showed that rumoured talks of a wireless network-sharing agreement between Shaw and Rogers Communications Inc. had led to nothing. He also said Shaw's claims that WiFi tablets were hot sellers, and do not need to be subsidized by carriers, papers over the fact that this means Shaw cannot profit from the huge wireless data growth inherent in iPhones, BlackBerrys and smart phones running Google Inc.'s Android operating system.

"(This) gives Shaw peripheral exposure at best to wireless data, the only real growth driver for the industry," Ghose wrote in a note to clients. "While iPads and other tablets work on cellular and WiFi and are generally not subsidized by carriers, we wonder how many consumers will elect to use such devices only on Shaw's WiFi when they can access both WiFi and ubiquitous coverage through cellular from Telus in the west."

RBC Dominion Securities analyst Jonathan Allen, however, agrees with Shaw's rationale that going with a WiFi network will allow the company to skip the process of spending more than $1 billion in capital expenditures, like it's rivals.

"The decision not to do a wireless launch is probably the correct one, in our view," Allen wrote in a research note. "If they could have secured a partnership with Rogers, then we think the economics might have been sensible. But having watched Videotron and other new entrants over the last year, the cap-ex cost to do it alone is very high (likely $1-billion for Shaw) and returns have been more modest than initially expected."

Allen noted that Shaw could conceivably sell to another new entrant the spectrum it bought for $190 million in 2008, though he noted the spectrum may be worth less now, possibly around $150 million. Mr. Allen added that he was unclear about the strategy, and was not sure if the announcement "is simply something for the company to 'show' investors."

"We are not sure if this is a serious new business model (ie., Will this contribute any revenue growth?)," Allen wrote.

At the same time, there were already cries in the sector to ensure the spectrum Shaw purchased back in 2008 would not fall into the hands of Canada's largest wireless companies: BCE Inc., Telus and Rogers. Shaw is not technically allowed, under auction rules, to sell the wireless spectrum licences to large, established providers until at least 2014, though it could sell the licences to fellow new wireless entrants, such as Wind Mobile or Mobilicity.

On Thursday, the Public Interest Advocacy Centre, which represents Canadian consumers before the national telecom regulator and speaks out on consumer issues, used its Twitter account to write: "Incumbents (Bell, Telus, Rogers) must be prohibited from scooping this spectrum, in order to promote wireless competition."