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Verizon Canadian Launch Chatter Causes Incumbent Stock Price Drop

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Verizon’s $700 million bid for Wind Mobile and talks with Mobilicity for a potential purchase is making waves in the Canadian wireless market. Incumbents have seen their stock price dropping as the red U.S. carrier’s entrance into the market will redefine the wireless landscape.

A powerful new entrant could consolidate struggling wireless startups while positioning itself as great competitor. As a result, incumbents are at risk of losing customers, having slimmer profit margins, and lower average revenue per user, the Globe and Mail reports.

Verizon is also said to be going to participate in the federal government’s spectrum auction to acquire spectrum that is contiguous with its U.S. holdings, according to Greg MacDonald, an analyst with Macquarie Capital Markets Canada Ltd. This also affects the price incumbents will need to shell out for acquiring spectrum, as it could add a $500 million premium.

“We believe the entrance of Verizon into the Canadian wireless market would be a game changer for wireless economics and wireless valuations,” Drew McReynolds, a telecom analyst with RBC Dominion Securities Inc., said in a research note. “Verizon has sufficient capital to consolidate the new entrants, participate in the 700 MHz auction (and future auctions) and strengthen existing networks including rolling out LTE [the newest-generation wireless network]. Advantages for Verizon would be scale, particularly on handsets, providing a price advantage in the market versus Canadian wireless incumbents. In addition, Verizon could realize roaming synergies and offer North American-wide plans.”

The red U.S. carrier has multiple advantages it can use to secure customers on Canadian soil, such as roaming, capital strength, and, more importantly, its handset-buying power, fueled by its already solid 99 million U.S. wireless subscribers.

Considering the above advantages, Verizon could easily undercut incumbents and attract customers. And if you add the two-year plan to the above, a successful entrance into the Canadian wireless market is already secured.

No wonder that Bell, Telus and Rogers investors are concerned about the future of the Canadian wireless “competition”. Verizon’s entrance comes at a cost to them: they could react by cutting costs — which could include layoffs as well — and greater bundling, as Adam Shine of National Bank Financial highlights.

Here is how Telus and Bell have reacted to Verizon’s entrance onto Canadian soil:

“We feel that we could easily adjust our competitive tactics,” Josh Blair, Telus’s chief corporate officer said, adding “I don’t think you are going to see any international carrier come in and go into rural Canada.”

“Offering U.S. carriers access to more spectrum and at a lower price than Canadian companies completely skews the marketplace. We would never get the same advantages in the U.S. or anywhere else,” Bell spokesman Mark Langton said in an e-mail.

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