Genuity report on WIND Mobile

Given the fascinating intersection of technology, politics and telecom that is represented by Canada’s new wireless players, we do pay particular attention to what Dave, Public and Wind and are up. Naturally, so does Bay Street’s brokerage houses. Here is a summary of a note issued by Genuity Capital Markets, penned by ranked analyst Dvai Ghose:

“WIND Mobile addresses its challenges

· Investor lunch with WIND Canada management addressed major issues – We hosted a lunch with WIND Mobile management and leading Institutional Investors in Toronto last week. WIND was represented by its Chairman, Anthony Lacavera, CEO Ken Campbell, Brice Scheschuk, CFO of Globalive and Heather Gomes, CFO of WIND Mobile. The main topics discussed were: 1) differentiation; 2) device availability and pricing; 3) distribution; 4) network management; and 5) financing/survivability.

· WIND Mobile’s unlimited price plans are unique – Unlike the incumbents, WIND offers truly unlimited voice and data plans at a fixed price. While a customer can build a similar plan through the incumbents, to recreate WIND’s $45.00 per month unlimited voice and text plan, the incumbents’ discount brands charge $100.00 per month or more. The incumbents could launch their own unlimited plans, but this could negatively impact their long distance and overage revenue, and overall ARPU and margins. While other independent new entrants like DAVE and Public Mobile also plan to offer unlimited plans, unlike WIND, they do not have spectrum across Canada. Consequently, while WIND Mobile will be able to offer unlimited usage across Canada, with the exception of Quebec, when its network roll out is complete, other independent new entrants will have much smaller coverage areas for their unlimited plans.

· Fears regarding AWS device availability have proved to be unfounded; customers may prefer to pay full price for devices in return for lower airtime prices and no contracts – WIND launched the multi-mode BlackBerry Bold 9700 at about the same time as the incumbents, along with three other devices and one data stick. Clearnet and Microcell only had one PCS handset when they launched in 1996 and 1997, respectively. Google’s Nexus One currently only operates on the AWS band, although WIND does not currently have the device. Unlike the incumbents, WIND does not subsidize devices. However, this is more than offset by the fact that: 1) airtime pricing is much lower; and 2) customers are not tethered to multi-year contracts. The experience in markets like Japan shows that customers prefer to pay full price for their devices in return for lower airtime pricing and no contracts. The Japanese experience also shows that such plans can generate higher margins for wireless carriers than the subsidy model.

· WIND Mobile has built some distribution – WIND currently has 34 company-owned stores in Toronto and Calgary. It also has an exclusive distribution agreement with Blockbuster in Canada. We expect WIND to continue to enhance its distribution by building more of its own stores and dealer channels, and signing more third party distribution agreements with retailers such as Future Shop/Best Buy.

· WIND Mobile has faced near-term technical challenges, but the real question for us is if it can sustain unlimited data plans – The main teething issues seem to have been: 1) roaming between WIND’s network and their incumbent roaming partner; and 2) number portability. However, network interoperability issues should decline as WIND builds out more of its own network and reduces reliance on its incumbent roaming partner. The bigger issue for us is whether WIND can sustain unlimited data plans.

· Capital raising challenges are easing – Given Clearwire’s US$2.5 billion high-yield issuance at the end of 2009, it seems that credit markets have re-opened for wireless new entrants. We expect WIND Mobile to tap the high-yield market in Q1/10. While Microcell went bankrupt in 2003, and Clearnet may have gone bankrupt if it had not been acquired in 2000, we believe that Orascom’s financial and operational support puts WIND Mobile in a fundamentally stronger position.

MRM