In battle for Western Canada, Shaw bets big on WiFi

CALGARY — The Globe and Mail

WiFi now accounts for about 78 per cent of the data consumed on smartphones, according to a new international report by consultancies Mobidia Technology and Informa Telecoms & Media. (Todd Korol For The Globe and Mail)

In the spring of 2011, just months after becoming chief executive officer of Shaw Communications Inc., Bradley Shaw took a trip to the United States that changed his view of the wireless industry.

While south of the border, he dined with his friend Thomas Rutledge. An industry veteran, Mr. Rutledge is best known these days as CEO of Charter Communications Inc., the man who spearheaded a now-foiled takeover of Time Warner Cable Inc. But at the time of that meal, Mr. Rutledge was chief operating officer of Cablevision Systems Corp., a cable company that had launched a WiFi network.

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“We talked quite a bit about it and the opportunity – and what they were seeing and where it was going,” Mr. Shaw said. “I really respect Tom because he is one of the top operators, for sure, in the U.S. in cable. And so that helped – helped formulate and understand that it’s such a natural [evolution] from broadband.”

Mr. Shaw was intrigued by what he heard about how Cablevision’s customers were using WiFi.

Months later, Mr. Shaw surprised investors by nixing his company’s plan to launch a cellphone network after spending $189.5-million on spectrum. Instead, Shaw would roll out a less costly WiFi network as an extension of its high-speed Internet service.

Shaw embarked on a pilot program in late 2011. Then the company went quiet, making very few public statements about its plans for WiFi, including how it planned to make money off a service that most consumers were already using for free in coffee shops and public libraries.

It was a silence that perplexed some Bay Street analysts who were chronicling the market share gains in TV and Internet that chief rival Telus Corp. was making at Shaw’s expense.

With its mainstay cable business already under attack, industry watchers were concerned that Shaw’s inability to compete in the cellphone market would prove an insurmountable hurdle in its battle for Western Canada.

The stakes are high. Consumers in British Columbia and Alberta use more data on the Internet than other Canadians. For that reason, Shaw is focused on differentiating its high-speed Internet service in order to regain an upper hand on Telus.

Shaw is making WiFi the “centrepiece” of a new strategy to become its customers’ “primary network” both inside and outside the home. Although other Canadian companies also offer WiFi services, Shaw’s approach is unique among big cable companies because it is not using it to complement an existing cellphone service.

Now the right conditions appear to be in place for Shaw to make a breakthrough. Although consumers are still upgrading to the latest smartphones, WiFi use on those devices is exploding in Canada and other markets.

That trend could spell increased opportunities for Shaw, which officially launched its WiFi network in September. Global carriers are experimenting with ways to monetize their WiFi networks at a time when consumers are devouring increasing amounts of mobile video.

In fact, WiFi now accounts for about 78 per cent of the data consumed on smartphones, according to a new international report by consultancies Mobidia Technology and Informa Telecoms & Media. The report bases its findings on an analysis of 10 countries that lead in the rollout and usage of ultra-fast LTE (long-term evolution) networks. “The challenge is to prevent WiFi from eroding the mobile data business model, and the opportunity is to better integrate WiFi with other mobile and fixed broadband networks to provide an improved end-user experience,” the report said.

As a result, Shaw is positioning the Internet, rather than cable, as its new anchor product. And it is betting that the surging popularity of WiFi will help it turn the tables on Telus over the years to come.

Customer retention

Putting the Internet front and centre is a familiar refrain. About 13 years ago, when high-speed Internet was still a relatively nascent market, Shaw launched its “March to a Million” campaign – an offensive to reach one million subscribers.

Fast forward to 2014, and the company’s battle plan has shifted from customer acquisition to customer retention. Shaw has nearly 1.9 million Internet customers compared with roughly 1.4 million at Telus. Although a small number of Telus’s base remains on dial-up service, the Vancouver-based telco is gaining share of high-speed customers thanks to its Optik product that offers both Internet and TV service.

Shaw Internet customers are given “free” access to the Shaw Go WiFi network, which includes more than 30,000 hot spots across the country in markets from Victoria to Sault Ste. Marie, Ont. – communities in which Shaw already has operations. After signing up for the service, Shaw customers are able to use a range of WiFi-enabled devices, such as smartphones, laptops and tablet computers, to access the Internet while in those various hot-spot zones.

The WiFi service is being positioned as a “value add” for Shaw customers in an effort to keep them loyal. The biggest benefit is that Shaw Go WiFi usage does not count against a customer’s residential data cap.

Shaw’s WiFi network is poised to become a growing thorn in Telus’s side. That’s because it allows Shaw Internet customers, who buy cellphone service from carriers including Telus, to use their smartphones and other devices on its WiFi network – allowing them to forgo big data plans and save money on their cellphone bills. “It is open for every Bell, Telus and Rogers customer in Western Canada. So, come on in,” Mr. Shaw said, referring to those mobility customers who purchase their home Internet service from Shaw.

The WiFi network is used by 300,000 customers and 600,000 WiFi-enabled devices. Customers are using, on average, about one gigabyte of data a month on the WiFi network, comparable to some smartphone plans.

To date, Shaw has invested $75-million in its WiFi network through a mix of general infrastructure spending and money from the company`s accelerated capital fund. The company is now working to broaden its coverage by signing more deals – including with municipalities. So far, it has inked about 40 of those municipal deals.

“We’re not chasing the mobility business where if you’re driving down the road or walking down a residential neighbourhood. We accept that our differentiated Internet experience is complemented by a cellphone service for those use cases that we don’t provide,” said Jay Mehr, Shaw’s chief operating officer. “But wherever people are and hang out, we want them to be on our network.”

There are also early indications that Shaw Go WiFi is helping the cable company attract new customers to its high-speed Internet service, executives said, but declined to provide specifics. In some public venues operated by municipalities, Shaw is required to provide “guest access” to non-customers. Although the company may not be able to make money from those people, executives consider “guest access” a way to show non-customers what they are missing.

Shaw’s WiFi strategy is designed to retain the company’s most valuable Internet customers – those who opt for the biggest data buckets and generate the fattest bills, said Chris Emery, director of service provider business development for Cisco Canada, who has worked with Shaw.

“Those are sophisticated users; well-educated, lots of disposable income, and a household full of Apple products or Samsung products. And they are all WiFi-enabled,” Mr. Emery said. “So, if I am a Shaw subscriber, what I really like about my Shaw Internet service is that it is not just cable. I can go downtown to the library, to the park. I can go to any populated area. Pull out my WiFi device and I have an extension of my Shaw Internet service with me wherever I go … What it is, is an un-tethering of my Shaw cable-based Internet subscription, and that differentiates my Internet service from somebody else’s.”

Shaw is also looking to the future. It is in the process of testing a Shaw Go phone app that would enable customers to use their smartphones as an extension of their home phones in WiFi hot spots while they travel. It is also exploring options for video streaming to better compete with players such as Netflix.

Although the company has been criticized for its inability to monetize the WiFi service to date, international industry developments suggest there are opportunities to do so down the road. For instance, it could eventually charge for premium “guest access” for tourists attending the Calgary Stampede or perhaps provide WiFi coverage to more venues such as those hosting signature festivals or sporting events.

International carriers such as BT and Orange charge nominal amounts of money to customers seeking “premium” access or a boost in speed.

Shaw could also ostensibly sign WiFi roaming deals with international carriers that are also building out WiFi networks. Similar to cellular service, such WiFi roaming deals would allow each carrier’s customers to roam seamlessly from network to network when they travel.

In 2012, five U.S. cable companies struck a deal to give their customers access to each other’s hot spot, creating a massive network, known as CableWiFi, that comprises more than 200,000 access points.

Additionally, it could make deeper inroads with retailers. For instance, Shaw already provides WiFi access in the Chinook Centre shopping mall in Calgary. Eventually, it could work with individual retailers to provide targeted advertisements to consenting consumers’ smartphones when they are a short distance from the store, and provide more detailed analysis to malls about consumer traffic patterns, including where shoppers congregate the most, allowing them to adjust rents for prime locations.

There are even opportunities to provide WiFi services to other types of businesses, such as agriculture. Some vineyards, for instance, are already putting WiFi tags in the ground to measure temperature and humidity, while mining companies are using those tags to actively monitor equipment for wear and tear, according to Cisco Canada, which sells WiFi equipment.

“We have the advantage of time. And others have gone before us, so there is a ton of knowledge that we were able to benefit [from],” said Greg Pultz, Shaw’s group vice-president of WiFi.

 

The challenges

But the financial rewards are unclear.

“I think the challenges associated with Shaw’s WiFi remain monetizing the product because consumers expect free WiFi, and differentiating the product from the free WiFi that is already there,” said telecommunications analyst Dvai Ghose of Canaccord Genuity, who is known for his bearish views on Shaw’s stock, which he rates a “sell.”

There are also other hurdles to overcome. Anyone who has used a public WiFi network in a coffee shop or quick-serve restaurant will have seen warnings to be wary of conducting sensitive communications, such as mobile banking, over public networks. But experts say new technology has addressed many of the security risks.

That is largely because early WiFi networks, such as those used in mom-and-pop coffee shops, did not use encryption technology. As a result, consumers have been left with the impression that modern WiFi networks are less secure than their cellular counterparts. Carrier-grade WiFi networks use security precautions, such as user authentication and scrambling of messages, but consumers may not make the distinction. And, ultimately, consumers must bear the responsibility of ensuring their WiFi-enabled devices are equipped with current anti-virus and anti-malware software.

“The security issue will always be an issue. Let’s be clear,” said Ahmed Etman, general manager of enterprise networking and security with Cisco Canada. “The impression that the WiFi network is less secure than the wired, I totally disagree with this – especially in the enterprise context” because companies view those networks as more sensitive and take numerous precautions.

And there are some challenges that even the most sophisticated equipment are still unable to resolve. For instance, the quality of voice communications over WiFi, whether they be videocalls on FaceTime or Skype or other voice over Internet protocol apps, can be spotty if there are too many users on the network or if a consumer is walking around.

 

Telus’s response

Now that Shaw’s WiFi rollout is picking up steam and poaching some data traffic from rival cellular networks, investors are curious about how Telus will strike back.

Last year, the Vancouver-based telco quietly began deploying “small cells,” mini cellular antennas that are used to bolster coverage and capacity, in Western Canada as a complement to its main cellphone networks. Small cells, which provide a WiFi-type service using both licensed and unlicensed airwaves, enable carriers to “offload” data traffic from their cellular networks thereby preventing congestion in areas teeming with smartphone users.

“We’re deploying it throughout Western Canada where it makes sense for our customers – where ... data demand is high and people congregate. Malls and places like that,” said David Fuller, Telus’s chief marketing officer.

As smartphone users consume increasing amounts of data on LTE networks, global carriers are expected to ramp up their small cell deployments over the next two years.

“LTE-4G is great but it is unable to penetrate concrete and in urban/densely populated areas, mobile operators need to increase the network capacity and to ensure that their customers are not experiencing call drops/inconsistent services. Small cells deliver upon these needs,” said Patrick Ostiguy, CEO of Accedian Networks, a Montreal-based company that creates hardware and software solutions for mobile networks.

Telus has been stealing market share from Shaw ever since launching Optik TV and Internet product in mid-2010. Executives estimate that nine out of 10 customers combine TV and Internet with Telus.

According to the companies’ latest financial results (which span different reporting periods), Telus added more than 38,000 net new customers for television during its fourth-quarter (the three months ended Dec. 31, 2013), while Shaw lost about 29,600 during its fiscal first quarter (ended Nov. 30, 2013).

On high-speed Internet, meanwhile, Telus added 21,000 customers, compared with more than 2,700 for Shaw during those same reporting periods. “Not only are we winning on TV, I believe we are fundamentally winning on Internet,” added Mr. Fuller.

Back in Calgary, Shaw executives don’t see it that way. Jay Mehr, chief operating officer, chalks up Telus’s gains to nothing more than old-fashioned discounting.

But Mr. Shaw doesn’t see the point of engaging in price war with Telus for short-term gains, when the company has a new Internet strategy to retain and win new customers for the future.

“We’re cable guys. We want to win. We’ve always won ... I realize that and we have to do it differently.”

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