Does the North need Northwestel?

Logovertical
To start off: this isn’t some wild and crazy I-hate-Northwestel bashing
piece. I don’t hate Northwestel, I actually like the company. I had the
opportunity to work there for a while and it’s a great company to work
for (despite its lack of a flex-time policy for working parents). Its
people are top-notch.

Instead I’m going to run through a seemingly far-fetched but quite
plausible scenario in which the grass-roots movement of internet
telephony undermines and ultimately destroys Northwestel as a
telecommunications company in the North.

The central question I’m probing is: what if a majority of northern
residents abandoned their Northwestel phone lines and subscribed to a
third party VoIP telephone service? VoIP stands for "Voice over IP",
and is a common way of using the internet as a medium for making phone
calls.

I’m going to use a VoIP company called Vonage for this study, as they’re the most accessible and easiest-to-use service currently available.

Vonage offers affordable plug-and-play VoIP services that include a wide variety of calling features and at least 500 minutes of long distance calling per month. The only requirement for Vonage is, of course, a high speed internet connection. A PC is not needed.

The cool thing about Vonage is it’s not geographically based. When you sign up, you can get a phone number from anywhere in North American or Europe and it will behave like a local number in that region. The other bonus is that calls between Vonage users, wherever they are and whatever their numbers are, is free; this is called "in-network calling".

(Compare that to Northwestel: you have to pay to call Marsh Lake from Whitehorse.)
The main hurdle to Vonage taking off on Northwestel’s turf is the lack of the 867 area code availability. In my estimation, based on a few informal conversations with folks, this is the major holdback to more northerners not subscribing to Vonage so far.

However, if you consider Vonage’s in-network calling feature, the area code issue is rendered moot. If enough northerners subscribed to Vonage, no matter their choice of area code, local calls would remain cost-free. The truth is, VoIP telephony makes the concept of the area code irrelevant. With VoIP, a phone number is just like an email address: accessible from anywhere without cost.

Service Monthly Annually
Northwestel
Residential Phone $29.33 $351.96
Enhanced Voice Mail $8.95 $107.40
Call Display $5.95 $71.40
Call Waiting ID $5.00 $60.00
Call Return $5.00 $60.00
HSI Lite (384K) $39.95 479.40
Totals $99.18 $1,190.16
Vonage and WHTV
Vonage $19.99 $239.88
WHTV Internet (256K) $40.95 $491.40
Totals $60.94 $731.28

But what about cost? If you consider a base set of internet and telephone services from Northwestel against a comparable set of services from an alternative internet provider and Vonage, the difference is surprisingly large. Northwestel costs on average $1190.16 per year. Vonage with WHTV cable would cost $731.28. (See table inset for details.)

This doesn’t include any additional long distance calling charges that would be assessed on top of the base rate with Northwestel; long distance is included in Vonage.

Consider if just 500 people each in Whitehorse and Yellowknife made the switch to Vonage. That’s a total gross revenue loss of at least $1.2 million dollars for Northwestel, more than the company’s net income for 2004.

The scary thing for Northwestel here is that a significant shift to VoIP among northerners is a total blow to their bottom line. It will hit at every pillar of their revenue: long distance, landline phone services, and internet services. The only remaining source of income for the company that wouldn’t be directly impacted is their subsidy from southern telephone companies, which totalled over $9 million dollars in 2004.

Northwestel has kind of backed itself into a corner on this matter. It’s an "everything or nothing" proposition with their services. To get internet with Northwestel, you must have a physical Northwestel phone line. You couldn’t just keep your Northwestel HSI service, cancel your landline and subscribe to Vonage.

So a move to VoIP represents a wholesale abandonment of Northwestel.

The annual subsidy that Northwestel receives proves that this is a company barely solvent. Were significant revenues lost to alternative unregulated VoIP providers, that subsidy may be increased to keep Northwestel afloat, but for how long? How much are southern Canadians willing to pay to keep the country’s nether regions in touch?
I would suggest not much more.

Once the Vonage ball starts rolling in the North, the critical mass of users would soon be reached to cause a crisis for Northwestel. It would force the company to redefine itself as a business entity. Stripped of customers using its traditional services, what would Northwestel do?

At this point it’s worth noting that Northwestel is the heart and soul of the northern internet. They manage and essentially "own" the infrastructure that keeps northerners connected. So to suggest that Northwestel will one day evaporate is not realistic.

A worst-cased scenario, however, may see Northwestel declare bankruptcy. At that point the federal government would step in and take over management of the network infrastructure in the North, probably in conjunction with the territories. It would then be managed just like any other public service such as roads and health.

Which, to my mind, is the way it should be, anyway.

Before it gets that bad, though, one option would be for Northwestel to diminish their business operations to just providing internet infrastructure services. They may also choose to break their ADSL services from their landline services and become a local ISP in some capacity.

However, it would be most advisable for Northwestel to get an early jump on the VoIP transition and start offering it to their customers immediately, along with the cost savings that a move to Vonage would offer.

In other words, Northwestel needs to stop thinking of itself as a traditional telephone company and redefine itself as a progressive telecommunications firm that leverages new technologies to reduce costs in remote areas.

Without a doubt, the next few years will prove that the traditional "telephone" is dead as VoIP becomes ubiquitous. If Northwestel wants to survive — thrive, even —  the company has to begin acting now.

First published in the Yukon News on Friday, March 17, 2006.

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7 thoughts on “Does the North need Northwestel?

  1. Honestly, this type of radical change needs to happen top-down and with the current executive being who they are, I doubt it will ever happen, or at least not soon enough. Perhaps a half-ass effort but not the dedicated march forward that it needs to be. Only time will tell.

  2. As far as I understand it, VoIP termination that competes with Nwtel is not allowed in the North. Technically Vonage can’t offer VoIP services to Northerns because of CRTC regulations. So, if Northwestel is smart (or quick), then they need to take advantage of this ‘down time’ where the competition isn’t legally allowed to compete.

  3. dudes – you are all a little bent.

    You have no idea the progress the big N is making on the VOIP front. Besides its all about shifting revenues from one pile to the other and the telecom world is always in flux with that sort of thing. Its happening with the network side of things all the time – shifting from one product / service to the next on a regular basis – its only now that such a radical change is happening in the consumer voice market. No one is going bankrupt here.

    All big Telcos across the world are going through the same thing with VOIP and they will all be fine in the end. Don’t be naive – they are all completely aware of the landscape and the impact of VOIP and they are all getting in the game.

    Next time you write something like this Andrew, give a call into Northwestel first to see what they are up to. You make some great points in the article, but you did it without any real knowledge of Northwestel’s strategic direction, so it reads rather naive.

    Burn more fossil fuels!

    Chris

  4. McNutt – I’ve several times suggested that somebody in Marketing get a corporate blog for this very type of public communication, but….will you be the first?

  5. I have Vonage in Yellowknife with a 416 area code and it works great. Face it, the biggest drive for VoIP in the north is the people who move here. I purchased Vonage not to save long distance with Northwestel but ensure my friends & family could keep in touch with me and avoid long-distance. The main downside to VoIP in the north is that its tough to get invited out to parties when your buddy down the street has to pay $0.25/min for long distance on his cell phone on his cell phone.

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