Rogers 2015 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS
OPERATING EXPENSES
We assess operating expenses in two categories:
• the cost of wireless handsets and equipment; and
• all other expenses involved in day-to-day operations, to service
existing subscriber relationships, and to attract new subscribers.
The 24% increase in the cost of equipment sales this year was a
result of:
• a shift in the product mix of device sales and upgrades towards
higher-cost smartphones; and
• increased equipment sales volumes as discussed above, the
majority of which were higher-cost smartphones.
Total customer retention spending (primarily consisting of
subsidies on handset upgrades) increased by 12% this year as a
result of:
• increased device upgrades by existing subscribers due in part to
the industry’s double cohort, as discussed above; and
• increased subsidy rates provided on higher-cost smartphones;
partially offset by
• improvements in our sales channels resulting in lower
commissions.
Other operating expenses (excluding retention spending)
increased this year as a result of higher service costs and
incremental expenses resulting from our acquisition of Mobilicity,
partially offset by efficiency gains and improvements in cost
management.
ADJUSTED OPERATING PROFIT
The marginal decrease in adjusted operating profit this year was a
result of higher operating revenue, partially offset by higher
operating expenses, as discussed above.
(IN MILLIONS OF DOLLARS)
WIRELESS ADJUSTED OPERATING PROFIT
2015
2014
2013
$3,239
$3,246
$3,157
(%)
LTE COVERAGE AS A PERCENTAGE OF THE CANADIAN POPULATION
2015
2014
2013
93%
84%
75%
OTHER DEVELOPMENTS
Investment in Glentel
In May 2015, we completed our purchase of 50% of the common
shares of Glentel from BCE for cash consideration of $473 million.
Glentel is now jointly owned with BCE. Glentel is a large multicarrier
of wireless and wireline products and services with several hundred
Canadian wireless retail distribution outlets, as well as operations in
the US and Australia. Our investment in Glentel is accounted for as
a joint venture using the equity method.
Acquisition of Mobilicity
In July 2015, we completed the acquisition of 100% of the
outstanding common shares of Mobilicity for cash consideration of
$443 million. On acquisition, Mobilicity provided wireless
telecommunication services in Toronto, Ottawa, Calgary,
Edmonton, and Vancouver to its 154,000 prepaid subscribers and
owned AWS-1 spectrum licences.
Subsequent to the acquisition of Mobilicity, Rogers and WIND
undertook an AWS-1 spectrum licence asset exchange in Southern
Ontario to create an additional 10 MHz of contiguous, paired
AWS-1 spectrum for Rogers. In addition, Rogers transferred certain
non-contiguous AWS-1 spectrum licences to WIND in British
Columbia, Alberta, and various regions in Ontario for nominal cash
proceeds.
Spectrum licences
In April 2015, we participated in the 2500 MHz spectrum licence
auction in Canada. We were awarded 41 spectrum licences
consisting of 20 MHz blocks of contiguous, paired spectrum in
Canada’s major geographic markets. We paid to ISED Canada and
capitalized a total of $27 million for the licences, which included $3
million of costs directly attributable to the acquisition of the
spectrum licences.
In June 2015, we obtained AWS-1 spectrum licences from Shaw
after exercising a previously acquired option and paying the final
$100 million installment. We recognized the spectrum licences as
intangible assets of $352 million, which included $2 million of
directly attributable costs. The spectrum licences provide us with
more contiguous spectrum in British Columbia and Alberta.
Subsequent to exercising the option, other non-contiguous
spectrum acquired from Shaw was transferred to WIND.
44 ROGERS COMMUNICATIONS INC. 2015 ANNUAL REPORT