Dealmakers: King content ascends telecom throne

By Jamie Sturgeon | Financial Post | Jan. 26, 2011

In December 2009 the North American telecom industry made a sharp and irrevocable turn. Comcast Corp., the largest cable and Internet provider in the United States bid on then-flagging NBC-Universal, the prominent television network and producer of mega-hits like The Office and Saturday Night Live.

“That was a game changer,” Peter Buzzi, managing director and co-head of RBC Capital Markets’ M&A unit, said of the multibillion-dollar blockbuster deal. “Everybody in the industry asked ... ‘What does that mean for us?’”

The ripple effect would soon be felt. Desperate to find an investor to financially reflate its debt-laden television division, Winnipeg’s Canwest Global Communications Corp. announced two months later it would cede voting control to Shaw Communications Inc., Canada’s largest cable company — a Trojan Horse decision that would see Shaw eventually seize the assets outright.

What Comcast started and Shaw solidified, BCE Inc. would cement. “You could see the template in the U.S., then quickly in Canada. Everybody was getting aligned with content,” Dan Colohan, RBC Capital Market’s managing director of global investment banking said.

On Sept. 10, BCE Inc., which had dipped its massive appendages in the convergence waters before only to find them too frigid, returned with a running cannonball, bidding $1.3-billion in cash and stock for the TV assets of CTVglobemedia Inc., the country’s top broadcaster.

The New Convergence was on. The telecom landscape was changing rapidly, George Cope, Bell’s chief executive, said at the time. Owning video content to drive television and broadband subscriptions to a carrier — and away from others — is fast becoming the new norm.

“Our acquisition of CTV more than levels the playing field in our increasingly competitive industry,” Bell’s chief said.

The Shaw and Bell deals were two of the most high-profile transactions of 2010, and RBC Capital Markets played a pivotal role in both. As adviser to Canwest, Mr. Buzzi was at the table when Shaw’s initial offer ran headlong into fierce opposition from Goldman Sachs. It was RBC that Bell turned to last summer.

For Canwest, its long march into the hands of Shaw began when the financial crisis blew a hole in the side of the economy in late 2008.

Media firms that rely on advertising for a considerable portion of revenues are among the first to reel from economic downturns; ad budgets are easy targets for cash-conscious CFOs. Canwest was in a particularly bad position, having amassed $3.8-billion in debt in an acquisition spree during the pre-crisis credit binge.

At the time of the economy’s collapse, cash flows from the newspaper division were being used to service company-wide debt, a source of money that nose-dived. “They were facing some pretty significant liquidity issues,” Mr. Buzzi said.

Significant turned to dire when Canwest began tripping over payments. The newspaper division was unable to keep up on its own $1.5-billion debt load, let alone obligations at the parent holding company or on the syndicated debt tied to the deal with Goldman, the U.S. brokerage which bankrolled Canwest’s 2007 multibillion-dollar purchase of Alliance Atlantis Communications.

Under RBC’s watch, Canwest executed an arguably overdue sale of Australian broadcaster Ten Network in September 2009, wiping from its books $1.2-billion of debt. It was too little, too late. Two weeks later, Canwest was under creditor protection.

“There was no clear way to refinance that remaining debt,” Mr. Buzzi recalls. Creditors, such as New York hedge fund Golden Tree Asset Management, still had to be made whole. The question was how. “Basically what the bondholders said at the time was, ‘We’re prepared to turn our debt into equity and own this business. But they needed to find a Canadian equity investor, that was our next task.”

To satisfy Canada’s media laws which limit foreign ownership, RBC canvassed dozens of domestic parties to “recapitalize” Canwest. “Ultimately, Shaw was the winning bidder,” the banker says.

The Western Canada cable giant agreed to pay $95-million for a 20% economic interest in an emerged Canwest while taking ownership of 80% of the broadcaster’s voting shares. Canwest’s U.S.-based creditors were on side, but there was one major obstacle: Goldman, which remained a partner in CW Media, the entity that housed the Alliance Atlantis specialty channels.

CW Media represented the most attractive component of the Canwest empire and Goldman was not going to see Shaw attempt to reset the terms of its shareholder agreement with Canwest under the cover of court protection, vowing during tense court hearings to fight the cable firm at every pass.

Justice Sarah Pepall would accept Shaw’s bid but warned Shaw it would have to engage the Wall Street firm to win final approval. “You couldn’t close until you dealt with Goldman,” recalls one Bay Street lawyer on the file. “I don’t think Shaw had a clue what the end game was going to be. They just rolled the dice — and good for them; they took the risk that they would be able to come to some resolution.”

On May 3, Shaw agreed to pay off the investment bank for $700-million, in the process transforming its role from controlling partner into absolute owner for $2-billion. It is a potentially steep price tag analysts say, diverting the firm’s attention from an important push into wireless. However, six months later, Shaw Media was born while Canwest was well on its way to becoming a textbook case study in the risks of over-extension.

On the other side of Canwest’s sprawling corporate structure was its newspaper business. While Shaw was pulling for the broadcast assets, RBC was formulating a way to pay back $1-billion to the unit’s secured creditors, Canada’s largest banks.

The banks eventually agreed to a credit bid of $950-million — effectively a plan to seize the assets in the event the offer failed to attract a higher one.

Owed some $450-million that faced a writedown to zero, Canwest LP’s unsecured lenders stepped forward with a $1.1-billion offer on the chain, which they took ownership of in mid-June, rebranding it as Postmedia Network Inc.

“If you cut through all the complexities, you had an over-leveraged company in Canwest facing financial difficulties that over an 18-month period with a lot of twists and turns ultimately got split up into two packages, the television piece and the newspaper piece, and got sold to two different buyers,” Mr. Buzzi says.

“From a shareholder perspective it wasn’t a terrific outcome, although they did get a modest recovery at the end of the day. From a Canwest creditor perspective it was a good outcome,” he concludes.

The Shaw deal made most whole on the broadcast side. The new newspaper division owners paid out its secured group while their recovery hinges on how the business performs going forward.

The Shaw transaction also took off the table one of the few major media assets in Canada. For BCE, which was watching regional rival Quebecor Media Inc.’s cable subsidiary Videotron Ltee. aggressively leverage its own content and networks, a play for all of CTV soon became “crystallized,” in Mr. Cope’s words.

“There weren’t that many properties and the ones that were there were going, so it quickly became a focus for them,” RBC’s Mr. Coholan said. The CTV deal still faces regulatory clearance, while hearings into vertical integration could see new rules written that hamstring carriers’ content options.

Still, it is perhaps no surprise that weeks after the Shaw deal closed last December, the Street was alight with rumours that Rogers Communications Inc. was sizing up sports content powerhouse Maple Leaf Sports & Enterntainment. And they have not gone away.

Financial Post

jasturgeon@nationalpost.com

SEEING RED OVER METERED INTERNET

By Jamie Sturgeon | Financial Post | Feb. 04, 2011

Few know or perhaps care to know the commercial history of electricity in the 1880s.

Back then, the telegraph was about the only use for the new commodity. Then came the light bulb.

The seduction of light on demand stirred the imagination. Demand for electricity soared. But there was a problem. “The system wasn’t going to grow much unless you could find a way to bill people for it,” Donald Dewees, an economics professor at the University of Toronto, says.

Quite simply, companies like General Electric and Westinghouse needed sufficient profit to expand the grid.

“I suppose every house one hooked up could be charged a flat monthly rate but that’s going to encourage people to waste electricity or only the rich would get it,” Prof. Dewees says.

As might be expected, meters soon followed. Those who consumed more power paid for it, and at first quite a bit more.

The example parallels the polarizing — and now politicized — issue of so-called “usage-based billing (UBB)” of the Internet. UBB is a set of practices Canada’s largest service providers like BCE Inc., Rogers Communications Inc. and Shaw Communications Inc. have implemented allowing them to meter usage and charge for it.

Their defence is that online traffic is growing at such a clip that tiered systems are now required both to better match finite supply with demand, as well as generate the necessary profits to expand capacity, or grow the grid. Bell, for one, anticipates volume growth on its network of 25% this year over last, it says.

There is a growing herd, however, that is deeply dissatisfied with the explanation, charging that it is thinly veiled profiteering. A maelstrom of populist rage has flared up in recent weeks after regulators at the CRTC permitted Bell and others to begin imposing metering on their wholesale customers, the last corner of the market where the unlimited Internet could be found.

The Jan. 25 decision was the last step ensuring every Internet provider conforms to the capped metering model.

Perhaps sensing a ripe political opportunity, the Harper Conservatives outflanked opposition parties this week, publicly chastising the regulator and demanding further review of the decision, which looks primed for an early death.

But what is truth and what is fiction in this overheated debate? Are consumers being gouged or is this a uncomfortable but necessary transition? It appears the answer is both.

The economist in Prof. Dewees likes the idea of usage-based billing. So does the Internet user within the tenured professor. He does not download libraries of music from iTunes or stream hours of TV episodes from Netflix though he does “a little bit of YouTube.”

Usage patterns, however, are rapidly putting the professor in the minority. As online video viewing — which chews up several times more bandwidth than simple browsing does — explodes, more and more consumers are hitting or blowing past initial monthly “caps”.

Retail customers are not the only ones to hit the wall, or face stiff (but oddly varying) “overage” charges of between $1 and $5 for every gigabyte consumed after their initial monthly allotment is exhausted. Small business interests too are claiming the model threatens to suffocate their ability to innovate online, their imaginative efforts turned away by the price of admission to the Internet in Canada.

Wholesale providers like TekSavvy Solutions Inc. say those fees are pure profit for Bell, Rogers and the other large network owners. “Is the markup heavy? Yes,” Rocky Gaudrault, the resale carrier’s CEO says. “How much, I’m not sure but consider Bell’s UBB is near one-hundred percent pure profit [and] Rogers may not be far behind.”

Mirko Bibic, Bell’s head of regulatory affairs vehemently argues against this, saying Bell has put in place a pricing system that balances consumer needs with those of the company’s objectives to continue investing. All customers for example can pay $5 more a month for a 40GB cushion, or enough for 40 hours of high-def online video viewing.

“The folks that are criticizing the rate at which an [overage] gigabyte is priced are completely ignoring that fact,” he says. “They blindly ignore that because they want to make a story about the per-gig price.”

Similar to other major telecoms, Bell introduced tiered pricing plans with bandwidth caps in December 2006, more than four years ago. It is recent and fast-moving shifts in consumer habits at the source of the unrest, which has seen hundreds of thousand of Canadians rally to petitions and an emboldened few directly — and successfully — petitioning the federal government.

Mr. Bibic says the angst is directly tied to certain customers finally experiencing the limitations of plans that a short time ago were considered inexhaustible.

“It’s network congestion and the need to properly manage traffic,” he says in defence of Bell’s practices. “We needed to tackle the issue through pricing.”

There is pointed skepticism about Bell’s claims of congestion however. “We run our own network for a number of our customers and we don’t see the problems Bell is claiming exist,” says Clayton Zukelman, the head of Managed Network Systems Inc. (MNSi), a small wholesale provider in Essex County, Ont. about 30 minutes east of Windsor.

MNSi “co-locates” with Bell’s network at certain points then runs its own lines to customers. The technologies are comparable, but MNSi has installed new gear in recent months, Bell meanwhile has been chiefly focused on select portions of the network — its new IP-based television sub-system for example, with large swaths elsewhere a secondary consideration, he says.

“Their response to network traffic growing is to charge more as opposed to upgrading,” he says.

Bell, which earmarked the better part of a $2.55-billion capital budget for its wireline business last fiscal year, denies this.

But what about the overage fees-as-pure profit argument? Critics, which includes U.S. online movie-streaming juggernaut Netflix Inc., say it costs less than a penny to transport a GB. If true, blasting overage charges as blatant profiteering seems appropriate, even warranted.

“We can haggle over the price. Should it be two bucks a gigabyte or ten cents?” Mark Goldberg, an independent telecom analyst based in Toronto that has come out in support of UBB says.

But in principle, Mr. Goldberg, who organizes the Canadian Telecom Summit, an annual conference of the country’s industry establishment, is “hard-pressed to see how there is any other fair way” to match prices with supply other than usage-based billing.

Asked if overage fees are near-complete profit margin, Mr. Goldberg says: “I haven’t looked at the costing information — I don’t know how anybody on the outside could know what their costs are.”

No one outside of the companies does. No one but the Canadian Radio-television and Telecommunications Commission (CRTC), the body that formally gave the current regime a green light in 2009.

The data presented to the commission during successive hearings is competitive and therefore not public. But it is difficult to envision the CRTC, which has shown a zeal for defying corporate interests and even those of Ottawa, accepting a plan designed solely to drive exorbitant profits at Bell, Rogers and the other network owners. A convincing reason, or many, must have been put forth.

Peter Rhamey, analyst at BMO Capital Markets says people must remember that Bell is also a legacy telephone provider. Those revenues and profits continue to fall quarter after quarter, year after year as competing products like Skype and cable digital home-phone take share or consumers elect to go entirely wireless. Internet profits are required to “reinvent the network” for future-proofed broadband services, he says.

“If you look at their core wireline business, revenue is under pressure,” he said, noting Bell lost more than 92,000 phone accounts last quarter alone.

But is it possible the regulator was fleeced — a victim of slick numbers manipulation? If so, count the CRTC’s U.S. equivalent, the Federal Communications Commission as also being duped.

In December, the FCC chairman Julius Genachowski endorsed the usage-based pricing concept as a way to help providers manage their networks as part of the regulator’s over-arching net neutrality decision.

The endorsement flew over the populace’s radar screen however because metered billing has been rebuffed by organized consumers at every pass — for all intents and purposes, it doesn’t exist in the United States.

Since late 2008, companies like AT&T Inc. and Time Warner Cable have swept into cities like Reno, Nev., and Beaumont, Tex., with new capped plans and their corollary overage fees only to backpedal out of town.

“People get upset then they end up shutting them down,” Sean Buckley, editor of FierceTelecom, a widely followed industry newsletter, says.

“People want to do what they want to do with their broadband connection. They don’t want to be told, ‘Oh you can only use this much.’ I think that’s why you’ve seen such a backlash here whenever anybody has tried it.”

Unlimited plans pervade the U.S. marketplace. Despite this, AT&T, Time Warner Cable and Verizon Communications, which has aggressively pushed costly fibre out across their footprint in recent years, all operate profitable broadband businesses.

Nor does it appear congestion is a problem.

“At Verizon, we don’t have bandwidth usage caps,” Kevin Laverty, a spokesman for the U.S. telecom giant says. The company is not experiencing capacity issues, “therefore, usage caps aren’t required at this time.”

“From what I’ve seen, bandwidth constraints are an excuse” to raise prices, Mr. Buckley says.

Bruce Mehlman, co-chairman and founder of Washington D.C.-based Internet Innovation Alliance, a non-profit agency, takes a more centrist opinion: “There are two truths we know. Consumers prefer all-you-can-eat plans, and the exponential explosion of content is crashing into the finite bandwidth of networks,” he says.

Armed with FCC approval, it “seems predictable” that U.S. carriers will follow Canadian operators and introduce permanent tiered pricing at some point, he says.

“My parents don’t need a lot of bandwidth and would love to pay less. My kids want as much bandwidth as they can get and spend dad’s money on it. You will see tiers and options [emerge] that best match supply with demand,” he predicts.

Back in Toronto, Prof. Dewees nods in approval. “The notion that people consume something in different quantities and those that consume more should pay more strikes me as the same as everything else we do. You own a bigger house you pay more tax. You use more electricity, you pay more,” he says.

However, with a growing number of Canadians finding themselves on the wrong side of their caps these days, it is perhaps time to adjust the bandwidth meter upward.

Financial Post
jasturgeon@nationalpost.com

Media: Quebecor told to end self-dealing of TV content

By Jamie Sturgeon | Montreal Gazette | Jan. 26, 2011

TORONTO — Regulators have ordered Quebecor Media Inc. to abolish a pact between its broadcast network, Groupe TVA Inc., and cable division Vidéotron Ltee. that gives the latter exclusive access to on-demand programming.

The precedent-setting decision is a loud and clear warning shot to the country’s large integrated telecom carriers, such as BCE Inc., that walling off broadcast content for use only on their own television and Internet systems will not be tolerated.

Stemming from complaints made last June by BCE’s Bell Canada and Telus Corp., the Canadian Radio-television and Telecommunications Commission has found that an “exclusivity agreement” has existed between TVA and Videotron’s Illico service, which provides shows and programs on demand to its mainly French-speaking cable and Internet customers.

TVA is the largest broadcaster in Quebec and the producer of many of the most popular francophone programs. The agreement with Videotron gives TVA’s carrier sibling “a preferential position in the market relative to its competitors,” the CRTC found. More, the deal has a direct and “adverse effect on competition” by limiting consumer choice and giving the Quebec cable operator undue pricing power.

In its complaint, Bell, which counts Quebec as a core market for television subscribers, argued that it tried on numerous occasions to reach an agreement with Quebecor’s broadcast arm to no avail.

“Bell indicated that it tried several times, without success, to acquire the rights to distribute TVA programs on its video-on-demand [VOD] service,” the commission said.

Telus, which doesn’t compete directly in Quebec but holds a licence to, made similar claims.

Regulators ruled Wednesday that Quebecor must immediately cease giving its own subsidary “undue preference” to TVA on-demand programming. Specifically, the company must within thirty days have settled carriage agreements with Bell and Telus or have devised an agreeable process for expeditiously arranging such deals.

With no presence in Quebec, neither of the country’s other two major television distributors, Rogers Communications Inc. or Shaw Communications Inc., filed complaints about the arrangement. However, Wednesday’s decision sets the stage for establishing far-reaching ground rules that go well beyond Quebec’s borders and hold deep implications for every large integrated telecom carrier, including the country’s two largest cable providers.

Bell’s complaint was made before the telecom giant bid $1.3-billion to acquire CTV Inc. in September, a move that not only transforms the former phone monopoly into the largest telecom and media company in the country but locks in the bulk of the country’s broadcast assets under telecom carriers.

While insiders wondered whether the Montreal-based firm would have made the intervention had its bid for the country’s largest broadcaster already been made, others said Wednesday’s ruling — coming just days before the CTV bid goes before the CRTC for approval — likely means regulators will be looking for stiff assurances that the conglomerate will not use its content exclusively on any platform, including online and wireless.

Bell, which did not return a request for comment, has hinted at the potential value exclusivity could yield, signing pacts with sports leagues like the NHL and NFL for mobile streaming — agreements that could now come under increased regulatory scrutiny during hearings next week as well as fierce calls of hypocrisy from its Quebec rival.

-30-

Media: TSN angling for bigger fee haul

By Jamie Sturgeon | Canada.com | Jan. 20, 2011

The Sports Network appears to be seeking massive increases in the price it charges television distributors for access to the popular specialty channel, sources said Wednesday.

It is perhaps an early indicator that vertical integration of broadcast assets under telecom companies will stoke customer television bills higher.

Sources said TSN, which is owned by CTV Inc., has indicated it will ask for between 50% to 60% more money for continued access to the channel during coming renewal negotiations with distributors.

"They've given us a heads-up that it's coming," said a source within one of the major distributing companies, asking for anonymity.

As with other specialty channels, TSN charges television carriers like Rogers Communications Inc., Bell Canada and Shaw Communications Inc. a fee per subscriber. Exact figures are not disclosed.

However, costs for "competitive genres" have increased since the category was deregulated in late 2008.

TSN, one of the top-performing channels on the dial with revenue of $220-million in 2009, commands an already hefty price for carriage. Estimates across carriers are well north of $2.00 per subscriber per month. The requested hike would add potentially another dollar or two to the tab in some cases.

The added expense is usually flowed directly onto the TV carrier's customer but masked through general rate increases. But a hike of the magnitude TSN is said to be seeking is "well beyond what's reasonable," the same source said.

A potential cause could be the $1.3-billion Bell bid to acquire CTV on Sept. 10.

In recent months, industry observers have speculated the deal and others like it will see broadcast content aggressively used by parent carriers to drive subscriber growth for their telecom products while weakening rivals by potentially withholding it or inflating prices.

Asked about whether Bell, which must gain regulatory approval ahead of a summer closing date, could influence the price, several Bay Street analysts said it was possible.

While Bell does not control CTV yet, operating changes have taken place, including the appointment of Kevin Crull as the broadcaster's chief operating officer. Mr. Crull is the former chief of Bell's residential services.

CTV declined a request for comment.

Bell's bid followed Shaw's $2-billion acquisition of the Global network and specialty channels of Canwest Global Communications Corp. last year. The deals cemented the so-called "vertical-integration" model among the country's major telecom firms.

There are exceptions to the new norm, however, notably Telus Corp. and Cogeco Inc., which own no broadcast assets. Analysts suggest this group, which also includes MTS Allstream in Manitoba, are particularly vulnerable to rate hikes or service disruptions if aggressive content strategies are pursued by their media-wielding rivals.

"All the cable providers that own content have leverage in negotiations. Those who don't have less," analyst Jeff Fan of Scotia Capital said. "[It means] content costs are probably rising faster than their competitors."

Still, TSN is also bargaining with carriers from its own strengthened position. In an on-demand world where sitcoms and other programs are increasingly liberated from the traditional boundaries of linear TV, live events like professional sports are climbing in value.

"They probably feel they can bear more in the marketplace," one media lawyer suggested.

"It seems like the drivers for subscriptions are more and more this idea of 'must see' content, and sports is pretty high up there."

Media: Asper returns with stake in Fight Network

By Jamie Sturgeon and Theresa Tedesco | Financial Post | December 09, 2010

When Leonard Asper lost Canwest Global Communications Corp. for good this past summer, few knew of when, or even if, the prominent media executive or his family name would surface again on the corporate radar screen.

Wednesday, a firm controlled by Mr. Asper bought into The Fight Network Inc., a specialty channel operator featuring mixed-martial arts programming, for an undisclosed sum. As part of the deal, Mr. Asper has assumed the role of chief executive.

The move marks a return to the media industry for Mr. Asper after a nine-month exile following the prolonged collapse of Canwest, once the country’s largest media company (and owner of the National Post).

Sources close to the deal say his company has taken a 30% interest in the network, an independent sports channel with about 450,000 subscribers sold by all major cable and telco distributors through various program packages. He has the option to increase the stake to 51%.

“Len is rolling up his sleeves,” a source with direct knowledge of events said. The former Canwest chief looked at about 20 small-sized cable channels, sources say, including Pet TV and World Fishing Network and decided on The Fight Network because he loves sports. “He knows it, he likes it and he made a decision,” a person close to matters said.

Through mutual relationships, Mr. Asper quietly initiated talks with Mayhem Media Corp. in the months following his departure from Canwest. Mayhem is an entity owned by Toronto financier Loudon Owen, managing partner at McLean Watson Venture Capital and channel owner since 2008.

“Across the whole Fight Network team, there are people that have known Leonard for a very long time,” Mr. Owen said in an interview. “We're partners [and] the objective here is to build the business.”

In a letter to industry colleagues Wednesday obtained by the Post, Mr. Asper called the deal “a significant investment” that is “well positioned to take advantage of the increasing interest in all forms of combat sports.”

As CEO of the independent channel, he will have a fight on his hands.

Programming, especially sports content, is now in the direct cross-hairs of deep-pocketed television distributors like Rogers Communications Inc., Bell TV and Shaw Communications Inc. the Western Canada cable power that acquired Canwest’s extensive cache of television holdings for $2-billion in October.

Shaw’s bid for Canwest through creditor-protection courts in February was followed on by Bell’s $1.3-billion bid for Canwest’s broadcast rival CTV Inc. in September.

Analysts say vertical integration of media assets under wealthy distribution carriers will likely fan the cost of broadcast rights higher, making it even more difficult for smaller players to acquire high-quality content.

Sources close to Mr. Asper said he is well aware of the “risks” involved with the investment. His focus is on unique programming that makes the channel “relevant and a must have.”

Unable to service $3.8-billion of debt as the economy dove into recession, Canwest sought creditor protection last October. Four months later, Shaw emerged first as a minority investor then as outright acquirer.

Mr. Asper fought to the end to retain control of the firm his father founded with a single station in Winnipeg in the mid-1970s. He resigned in the spring to launch a competing offer through the courts which was ultimately unsuccessful. He led a shareholder suit against Canwest last summer seeking to overturn the sale in a final attempt to prevent a sale.

Now, it seems Mr. Asper is ready for round two. “This is an exciting opportunity — not without its challenges, but also of course one with significant potential,” he said in Wednesday’s letter.

Financial Post

jasturgeon@nationalpost.com

Telecom: Tricky road ahead for new Shaw CEO

By Jamie Sturgeon | Global News BC | Jan. 13

TORONTO — Shaw Communications Inc. formally introduced Bradley Shaw, the second son of company founder JR as its new chief executive on Thursday, roughly two months after the abrupt departure of older sibling and former CEO Jim Shaw.

Serving as the highlight of the cable giant’s annual meeting in Calgary, the new chief executive inherits a company with an enviable market position as the incumbent television and broadband provider in Western Canada as well as the still-growing insurgent operator in the home-phone market, something Telus Corp. has had to endure for more than half a decade now.

But make no mistake, Mr. Shaw, 46, is taking on a business confronting its share of obstacles in the coming quarters, a period that will see its rivalry with its major telco competitor in the West only intensify and for the first time see Shaw play the role of legacy incumbent.

“We all recognize the challenges we face with respect to the competitive environment,” the new CEO said during a conference call. “But we’re excited about the year ahead and the future.”

To start, Shaw is facing stronger headwinds to growth in its core cable and Internet businesses as the market matures and as Telus, armed with a new TV service and broadband capabilities, takes aim at Shaw’s most important customer base.

The effects showed in the company’s latest quarter with Shaw losing a worse-than-expected 7,500 basic subscribers. More, Internet and digital TV customer additions were also below expectations.

“Cable results were far from stellar,” Dvai Ghose, analyst at Canaccord Genuity said.

Shaw posted a net profit of $20 million, or 4 cents a share, on revenue of $1.08 billion. The Calgary-based company had a profit of 26 cents a share a year ago on revenue of $905.6 million.

The company’s first-quarter performance was buoyed by the new addition of Shaw Media, the extensive broadcast assets Shaw acquired for $2-billion from Canwest Global Communications Corp., now winding its operations up.

One-time charges including the $139-million regulatory “benefits package” Shaw paid to the CRTC as well as a $58-million hit on integration expenses bit deeply into profits for the quarter. But overall revenues and earnings excluding those items were better than expected owing to the addition of the Canwest assets.

Shaw will be looking to its media unit to drive earnings as the economy recovers, with early financial indicators suggesting the business is rebounding from the recession comfortably — revenues, cash flows and EBITDA all came in well ahead of Bay Street expectations.

The company is also eyeing the division to drive subscriber revenues through “creative ways to enhance and build new revenues streams,” Mr. Shaw said, a nod toward using Shaw Media content in a variety methods across Internet, cable and wireless products. Such a vertical integration model is being pursued by other carriers, such as BCE Inc.

The Canwest deal however dragged on through much of 2010, leading to suggestions the firm let its plans for a wireless launch slip from focus, a sentiment not aided by the departure of wireless head Laurence Cooke last week.

Several analysts suggest the deployment of a mobile business should be Shaw’s main bulwark against seeing competitive erosion in its main lines of business.

Although Shaw executives said they were “excited” about the opportunity Thursday, the company will push back its launch date to early 2012, and only on a very limited geography.

“We believe its best to take a disciplined approach,” Mr. Shaw said.

In the interim, the firm will focus energy on its media integration effort as well as customer additions in other areas, such as small- to medium-sized business telephony.

“At a high level, it’s something we’ve probably been lagging behind in,” Mr. Shaw said. “It’s a real growth opportunity for us, there’s good margins and we think its the next focus for us for growth.”

Financial Post

jasturgeon@nationalpost.com

Telecom: Verizon iPhone launch offers 'no surprises' for Canadian carriers

By Jamie Sturgeon | Montreal Gazette | Jan. 12

TORONTO — U.S. telecom giant Verizon Wireless announced Tuesday it will begin selling a version of the vaunted iPhone designed to run only on its existing 3G network for now, a likely relief for mobile operators here.

The long-awaited news quashed outside speculation that Verizon was preparing to launch the immensely popular Apple Inc. smartphone on its new but smaller next-generation "4G" system, a move that would have held implications for Canadian operators.

While the game has just changed dramatically for Dallas-based AT&T, Tuesday's news alters nothing for Canadian carriers Rogers Communications Inc., BCE Inc.'s Bell Mobility or Telus Corp. There were "no surprises," according to a source within Rogers.

But that's not to say there wasn't the potential.

Verizon, which has coveted the top-selling device since its launch with AT&T more than three years ago, is fast deploying 4G networks in select U.S. cities.

Speculation had arisen in recent weeks that the carrier would finally land the device and it would perhaps support 4G, touted to deliver ultra-fast data transfer speeds that trump even desktop Internet connections.

Had Apple introduced a 4G device with Verizon on Tuesday, the entire universe of handset makers, network vendors and app developers would have rapidly shifted its focus toward next-gen development, observers say.

The impact on Rogers, Bell and Telus — all of whom plan to adopt 4G down the road — could have been substantial, accelerating timetables, capital spending and rollout plans.

"It's one of the most iconic devices out there. One of the drawbacks on LTE (long term evolution) right now is that there are lots of data sticks but not many devices yet. Getting a huge device like that would change the landscape," one Bay St. telecom analyst said.

"It would have increased the incentive for Rogers, Bell and Telus to move faster."

Verizon, the largest carrier in the U.S., with 93 million subscribers, stoked rumours by unveiling 10 new 4G-capable devices at the Consumer Electronics Show in Las Vegas last week, indicating that some will go on sale by the middle of the year.

Verizon, however, has opted for the wider selling opportunity its 3G network gives it over the technological advantage offered by 4G, introducing a version of the phone equipped to operate only on its legacy network.

"We have a tremendous 3G network," Verizon's CEO Dan Mead said at a press event when asked about the decision.

Technological constraints also weighed. The first set of chips designed for Verizon's 4G network would require Apple to change the device's casing, forcing "design changes we wouldn't make," said Tim Cook, Apple's chief operating officer.

The decision means operators like Rogers, Bell and Telus can stay the course on their current plans, which will see mobile modems stick to using the new standard introduced in Canada later this year, and only in select areas.

For AT&T, it means the U.S. carrier is about to endure a repeat of what Rogers faced in November 2009 when Bell and Telus activated a multibillion-dollar joint network capable of supporting the iPhone.

Apple, looking to boost sales against Research in Motion Ltd.'s BlackBerry and the growing tide of Google Inc.'s Android-powered handsets, began selling through the two Canadian incumbents then.

Rogers's market share in wireless has been "rebalancing" to reflect the erased advantage ever since.

Financial Post
jasturgeon@nationalpost.com

Telecom: Loss of wireless chief fuels uncertainty over Shaw launch

By Jamie Sturgeon | Global News | Jan. 06, 2011

TORONTO — Laurence Cooke, the man heading up Shaw Communications Inc.'s wireless operations, is expected to leave the company imminently sources say, throwing further uncertainty over Shaw's highly anticipated push into mobile and perhaps leading to more delays.

"It's not official yet, he's negotiating his package," a source close to the matter said asking for anonymity.

Mr. Cooke was hired six months ago to lead the Calgary-based cable and Internet firm's wireless initiative, a new business it has been pursuing since acquiring airwave licences from Ottawa in mid-2008.

A spokesperson for Shaw was not immediately available for comment.

Sources said Mr. Cooke has cancelled a planned trip to the International Consumer Electronics Show in Las Vegas and a host of other meetings.

The main reason for Mr. Cooke's departure is personal, sources say, with his wife and children in Toronto and the executive based out of Shaw's headquarters in Calgary. However, others suggest he has grown dissatisfied with the position.

Mr. Cooke's departure is the latest in a string of unexpected management changes at Shaw. In October, the firm announced chief executive Jim Shaw would be leaving the firm this month. But an unseemly dispute with investors in Vancouver in November forced Mr. Shaw out early.

Younger brother Bradley Shaw has taken over as expected while wireless duties likely fall back to Michael D'Avella, the long-time executive that oversaw the new strategy until Mr. Cooke arrived in late June.

Shaw, the country' s largest cable company with 3.4 million subscribers, has taken a longer time than other new entrants to dive into Canada's $16.8-billion mobile market. It has led to speculation that the company has struggled to put a clear strategy in place.

Quebec-based Videotron for example launched in September, two years after acquiring rights to spectrum covering the province.

Many analysts now anticipate Shaw launching wireless in September, but others have doubts that Shaw has dedicated enough money an energy to the venture, which is occurring concurrently with the company's integration of the broadcasting assets of Canwest Global Communications Corp., acquired for $2-billion last year.

Videotron has spent roughly $600-million on its venture. Shaw meanwhile has committed about half of that. Sources close to Shaw said this week a September launch date would be "aggressive."

On previous conference calls Shaw hinted at a launch as early as 2009, shortly after it acquired $189-million worth of spectrum spanning Western Canada. Last spring, Shaw management suggested a launch in early 2011 only to again later hint at another delay.

The loss of Mr. Cooke, a former Bell Mobility executive with experience in deploying networks in the U.K. and South Africa, may mean plans are push back once more.

"It doesn't mean you can't launch wireless in September, but it's awfully difficult if your head of wireless has just left," Dvai Ghose, analyst at Canaccord Genuity said.

Telecom: Wireless consolidation looms as new entrant seeks out deals

By Jamie Sturgeon | Canada.com | Dec. 21, 2010

A year and a half ago, Alek Krstajic, the sharp-tongued chief executive of wireless startup Public Mobile Inc. made a blunt prediction during an annual industry gathering.

“Take a look at the three of us up here,” he said on stage during a panel discussion where he was joined by the heads of Wind Mobile and Mobilicity, two rival new entrants (pictured). “Two will not be here next year, or will be here but have different business cards.”

Events have proven him wrong so far, but that may soon change.

With a flurry of deep discounts on rate plans and phones from the new players in recent weeks in a hurried effort to add subscribers, speculation is growing that a day of reckoning fast approaches for at least one.

Sources suggest it is Public Mobile that has blinked first, seeking a partnership or merger.

“We have been approached,” a source within a rival new entrant confirmed last week, asking for anonymity. Another close to the second said Public Mobile has inquired directly with its investors.

All three startups have scratched out a toehold at the edge of the Canadian mobile market this year and in the process helped bring basic wireless pricing down across the industry.

Yet the weight of immense competitive pressure overhead from incumbents Rogers Communications Inc., BCE Inc.’s Bell Mobility and Telus Corp. means there likely will come a time when the much smaller firms must align or perish, many say.

“The number of players in the market is unsustainable, at some point consolidation will happen. The point though is when and how,” one analyst said.

In an interview this week, Mr. Krstajic is candid about his wishes: “I don’t think there is any question in my mind that it would be good for all parties concerned that the new entrants consolidate,” he said. “If you brought these three together, you’d have a really strong national footprint, distribution, call-centre efficiencies [and] stable pricing.”

Cursory talks have been held, he admits, but have not been “in depth at all.”

A potential stumbling block is Public’s spectrum. The airwaves the company uses are located in the so-called G band, a swath that larger spectrum-rich carriers have ignored and so too have the majority of handset and network makers.

“We can’t put a lot of value on that spectrum and that’s going to be a challenge and has been already in any discussions,” a source from another new entrant said.

“There’s no demand for handset manufacturers to build for it” at a time when mobile devices are being made to run on other frequencies.

It was during the last auction in mid-2008 that Mr. Krstajic, a former senior executive for Rogers and Bell, acquired the G band on the cheap allowing Public to launch in Toronto in May. While incumbents and new entrant rivals spent hundreds of millions on licences in established bands, Mr. Krstajic, supported by the OMERS pension fund as well as U.S. interests with a background in wireless investments, paid a paltry $53-million.

Mr. Krstajic says the strategy is working “brilliantly” giving it valuable savings to launch services with and help sustain it through its startup phase. More, Sprint Nextel, a big U.S. carrier, plans to use the band for advanced “4G” services, which will drive development around the frequencies, he says.

What has not been accounted for though is the painful price war happening at the low end of the market, where Public Mobile, Wind and Mobilicity are targeting their efforts in a race to grow subscriber figures — crucial to securing additional financing.

There have been at least four major price cuts from his competitors since November, Mr. Krstajic says, pointing out that Wind, the brand operated by Globalive Communications Inc., now offers unlimited voice and mobile data services for $40/month — a rate which Public Mobile initially wanted to launch simple talk-and-text plans on.

“I guarantee you that their average revenue per user is way below where they expected it to be a year ago,” he said.

It is a dangerous game threatening to result in their collective demise. It is also one being fueled by the incumbents.

In July, Rogers launched its Chatr brand, a low-cost service that overlaps the new entrants in every market they compete in. Bell followed fast by repricing its Solo brand, then Telus moved.

“Without Chatr, the new entrants wouldn’t have gone to the price levels they’ve gone to. There really is no differentiation, so what you’re left to compete on is price,” one analyst said.

Competition authorities have hit Rogers with a $10-million lawsuit for false advertising touting a superior network despite lacking sufficient evidence proving it. But it is a small cost for a move that appears to be sapping subscriber growth and hastening the unravelling of the startups (although it may still suffer as its large prepaid base migrates to lower rates).

Rogers cut Chatr prices in recent weeks to as low as $25 a month.

Analysts say some form of consolidation among Public Mobile, Wind and Mobilicity (owned by Data & Audio Visual Enterprises Wireless Inc.) however difficult, would help stem the downward slide for all.

“Consolidation would repair the market structure,” Phillip Huang at UBS said. “With fewer players price stabilizes.”

Financial Post
jasturgeon@nationalpost.com

Telecom: Rogers faces possible $10M fine for new service's 'misleading' ads

By Jamie Sturgeon | Financial Post | Nov. 19

The potential penalty for a “misleading” advertising campaign starts at t$10-million for Rogers Communications Inc. after competition authorities alleged Friday the carrier willfully deceived potential customers by touting its new “Chatr” brand was more reliable than those sold by new entrants Wind Mobile, Mobilicity or Public Mobile.

That fine — the maximum the Competition Bureau is allowed to level against first-time offenders — could rise however, when a case is heard by the Ontario Superior Court of Justice, where the tribunal will ask a judge to also order financial restitution to affected customers.

“Whenever we identify an egregious activity, we will not hesitate to seek the maximum penalty,” a bureau spokesman said.

The Competition Bureau wrapped a two-month investigation this week — a blazing pace by bureaucratic standards — into ads for Rogers' new Chatr flat-rate service trumpeting a superior network experience and call reliability compared to the corps of upstarts.

The bureau’s findings: “There is no discernible difference in dropped call rates between Rogers/Chatr and new entrants,” the body said in a statement.
“[The] bureau has begun legal proceedings against Rogers to stop what the bureau has concluded is misleading advertising.”

The body also delivered one of the stiffest decisions against a transgressor in memory, filing a request with the courts seeking $10-million, an immediate stop to the advertising campaign as well as “restitution to affected customers” meaning Rogers may yet be liable for more financial
damages depending on a judge’s decision.

What that means specifically is unclear, but according to tribunal spokesman Greg Scott, affected customers could be those who elected for a pricier
Chatr plan, starting at $35/month an up, rather than a new entrant product because of misplaced reservations about network quality.

Ken Engelhart, senior vice-president of regulatory for Rogers, defended the firm’s claims. “We have extensive, independent third party testing to
validate our claims and we stand by our advertising,” he said in statement. “We will vigorously defend this action in court.”

Rogers launched Chatr, which sells unlimited talk and text plans across Toronto and five other major cities, in July to directly compete with customers targeted by Wind and the other two startups.

“It's evidence of how far offside they were on this,” Anthony Lacavera,Wind's chairman said. “They are reacting to our presence in the market, so
we’re happy about that. What we’re not happy about is people using misleading or unethical advertising techniques."

Mobilicity first filed an anti-competitive complaint in August, followed by Wind's formal request to have the body review Chatr's ad claims. Wind has
gained more than 140,000 subscribers since rolling out services major markets across the country this year. Subscriber figures for Mobilicity, it too in markets across the country now, are not known.

The startup, backed by Toronto entrepreneur John Bitove Jr., challenged Chatr's legality under the so-called "fight brands" clause in the Competition Act, which for bids incumbents using temporary shadow products to kill of smaller opponents.

Mr. Lacavera breaks with the arguement however. “We fundamentally don’t have an issue with companies launching as many brands as they want, offering as many choices as they want, we took issue with the misleading advertising.”

The bureau is not seeking an immediate injunction on the ads however, but will seek to have the campaign halted through the upcoming court hearings.

-30-

Telecom: Mobile operators take battle to new front

By Jamie Sturgeon | Postmedia Network | Nov. 18, 2010

Far removed from the marketing carpet bombs new and established mobile operators are raining down on one another in cities across the country this fall, another front is opening up — political and regulatory scraps.

The latest salvo in this emerging battle was fired Thursday when startup carrier Mobilicity filed documents with Industry Canada urging the department to endorse laws recently brought on in Quebec and now tabled in Ontario curtailing what the carrier calls “anti-consumer” behaviour from market incumbents Rogers Communications Inc., BCE Inc.’s Bell Canada and Telus Corp.

“Without government legislation, incumbents will continue to avoid competition by employing ... anti-consumer tactics,” Toronto-based Mobilicity wrote in a letter to Industry Minister Tony Clement.

Mobilicity, which launched cellphone and mobile data services in Edmonton, Vancouver and Ottawa this week, alleges multiple transgressions from Rogers, Bell and Telus resulting in higher bills for customers, as well practices designed to unwittingly lock clients into longer contracts that remain costly to terminate.

The firm, which launched in Toronto in May as a low-cost alternative to the big three, said it “encourages the government to explore the introduction of consumer protective legislation similar to that enforced by the province of Quebec or recently introduced in the province of Ontario.”

Dave Dobbin, Mobilicity’s CEO, said the firm is rallying behind a private member’s bill introduced by Liberal backbencher David Orazietti in the provincial legislature this week that aims to reduce cancellation fees as well as make advertising and billing more transparent.

The move follows on the implementation in Quebec of Bill 60, legislation that makes similar demands of carriers in that province.

Mobilicity’s letter is the latest in a series of official complaints from new mobile entrants.

The startups, including Wind Mobile and Public Mobile face considerable in-market challenges against their well-entrenched foes, and are looking for any means of “relief,” Lawrence Surtees, senior analyst at IDC Canada said. “They have a number of frustrations.”

So-called “hard handoffs” of calls, where a signal is dropped once a customer leaves a new entrant’s home zone, is another point of contention made by Wind to regulators at the Canadian Radio-television and Telecommunications Commission.

There are no rules mandating seamless call transitions, and incumbents have used that to advantage by advertising that their larger networks experience fewer dropped calls, which is true. Rogers defended itself in a response to the CRTC dated Nov. 12 that its customers faced the same dilemma.

“Seamless handoff is not the norm for roaming arrangements,” the company said. “When Rogers’ customers pass from Rogers’ network to third party networks, their calls also drop.”

Yet Rogers’ launch of Chatr Wireless (and to a far lesser extent, a response from Bell’s Solo Mobile brand) is drawing the heaviest fire. Rogers introduced Chatr in July to directly vie for customers targeted by Wind, Mobilicity and Public Mobile.

Mobilicity and Wind are now challenging the brand’s legality through the Competition Bureau, a process still underway.

“They are not behaving politely, but no one expected competition to be a polite, gentlemanly sport,” Mr. Surtees said of Rogers and the other incumbents, recalling a quote from Theodore Vail, the U.S. architect of the AT&T phone system a century ago.

“He said competition is strife, it’s warfare and contention to the highest degree that the conscious of the contestants or the laws will allow.”

Financial Post
jasturgeon@nationalpost.com

Media: Rogers plucks CTV's Pelley to head up media ops

By Jamie Sturgeon | Financial Post - CBC.ca | Aug. 18, 2010

TORONTO -- Billed as “one of the largest endeavours in Canadian television,” the 2010 Winter Games in Vancouver arguably lived up to the hype, hitting a number of milestones while engaging record numbers of digital viewers.

The man overseeing the delivery of the Games to Canadians — and indeed the world — was former TSN president Keith Pelley. The Games’ success has translated into a personal triumph for the 46-year-old broadcast executive, who has been appointed head of media at Rogers Communications Inc., described as “the job” in Canadian television by some.

Rogers is the victor in a battle with CTVglobemedia Inc. over the broadcast executive, the former head of strategy for CTV who was said to be groomed as heir apparent to president Ivan Fecan.

“Quite a coup,” said one long-time media executive. “It was clear Keith was bright enough and capable enough to be the next Ivan there.”

Rogers declined comment Tuesday, but Mr. Pelley is doubtless being asked to replicate and advance the multiplatform vision he brought to the two companies’ joint Olympic venture last winter.

Operating in the shadow of Rogers’ telecom businesses is a stable of media assets consisting of the Citytv network, OMNI and Sportsnet channels, as well as dozens of radio stations and magazines. The Toronto Blue Jays baseball team round out a media division that accounted for less than 15% of Rogers’ $3.029-billion in revenue last quarter.

Leveraging that content across distribution platforms, either to attract more ad dollars or nurture customer loyalty through services like on-demand, has always been an aim but also a challenge.

Starting on Sept. 7 when retiring media chief Tony Viner hands him the reins, it will fall to Mr. Kelley to find ways to enhance content visibility and importantly Rogers brands, a trend many cable and Internet providers are pursuing.

“They’re pretty good assets but the idea is, they could be a lot more with the right person looking a little bit more to the future,” said another long-time media source.

Telecom services are undergoing convergence around a single standard — Internet Protocol (IP). It means providers are offering phone, TV and wireless services entirely digitally. Under this “new convergence” model, price is commoditized, meaning content and service differentiation matter more if not most.

“Content becomes a potential differentiator” for customers, Alan Sawyer, principal at Two Solitudes Consulting says.

U.S. cableco Comcast is acquiring broadcaster NBC-Universal under the banner while British Telecommunications Plc in the U.K. plans to introduce Project Canvas next year, a joint venture with the BBC and others to create on-demand, interactive content.

At home, Shaw Communications Inc.’s $2-billion acquisition of Canwest Broadcasting conjures up similar arguments.

There remains critics, but it is a strategy seemingly gaining ground, as Mr. Pelley’s appointment suggests.

As the Games endeavour showed, online video and the like can “perpetuate that customer relationship in the Internet space as a way of competing,” Mr. Sawyer says.

Financial Post
jasturgeon@nationalpost.com

Earnings preview: Telecoms dial 'S' for sweet spot

By Jamie Sturgeon | Financial Post - Stockhouse.com | Oct. 23, 2010

Make no mistake, there are seismic changes percolating just below the surface of the telecommunications industry.

New wireless competition, major acquisitions that hold the potential to sharply tilt the balance of power as well as new regulatory concerns threaten to drag on earnings for Rogers Communication Inc., BCE Inc. and Telus Corp.

Year to date, none have — while investors have poured funds into the three blue chip stocks in search of stability and yield. The S&P/TSX Telecom index is up 25% since Jan. 1, led by Telus’s 41% rise. Rogers is trading 25% higher and Bell up almost 22%.

The trio have been quintessential market darlings in 2010, a year that was supposed to be defined by instability for the big telecoms. New mobile startups were suppose to be winning over anxious customers in droves. In part as a result, incumbents were suppose to be at each others’ throats (even more-so) to guard not just wireless, but home-phone, broadband and TV subscriptions from rivals stepping up their attack.

The majority of these feuds have not emerged the way some thought, at least not yet, and the stocks show it.

To be sure, the three firms have benefited from a flight to defensive, yield-focused equities, but also from impressive operating results led by — big surprise here — wireless, where competitive threats appear to be largely mitigated.

As reporting season gets underway this week, most analysts agree the stocks hold the strong potential for yet more upside. “We believe all three large wireless incumbents are positioned to report better-than-expected results,” Jeff Fan said in a recent note clients.

Even with vast wireline businesses, it is no secret the major engines behind the profitability for all three incumbents are wireless earnings.

That is why shares in all three suffered a momentary shock last December when Globalive Wireless Management Corp. was given the green-light from Ottawa to launch Wind Mobile. Wind was joined by smaller urban-focused providers Mobilicity and Public Mobile in May, and Videotron Ltee. in Quebec on Sept. 9.

But the last 11 months have shown the new entrant threat to be inconsequential so far. Incumbents have effectively blunted the impact with new products like Rogers unlimited talk-and-text brand Chat, Bell’s matching Solo plans and Telus’s response to re-pricing in Quebec.

“Apart from Videotron’s launch in Quebec, wireless competition remained stable this quarter,” said Jonathan Allen at RBC Capital Markets. “New entrants did not appear to have much of an impact — indeed they have begun slashing prices and offering larger sign-up subsidies — a possible sign that growth is proving challenging.”

For Rogers, an area that will be closely watched is profit margin. CEO Nadir Mohamed warned investors on the last quarterly call that it could face substantial subsidy costs in upgrading its huge iPhone subscriber base to the newest iPhone 4. That threat has also likely been overstated, analysts say, given the short supply of the iconic device since its July 30 Canadian launch.

Rogers, which is expected to report earnings per share of 79 cents and consolidated revenues of $3.187-billion on Tuesday, faced potentially far bigger subsidies expenses owing to its large lead in smartphone penetration relative to Bell and Telus, who each hold about half the base that Rogers does.

But supply constraints mean Rogers margins will be spared, at least until next quarter.

Rogers’ considerable smartphone base stems from a network advantage it held between until last November. It has been almost 12 months to the day that the Bell and Telus activated their joint “3.5G” network, allowing them to sell the iPhone and other advanced smartphones that Rogers provided exclusively until then. The pair have been gaining on Rogers lead since, and are expected to show a further even of share distribution when Bell reports on Nov. 4 and Telus on Nov. 5.

“We forecast the incumbents adding roughly equal ... market share this quarter,” Mr. Allen said. He expects the firms to gain between 120-130,000 new customers apiece — a far cry from a few years ago when wireless was booming, but perhaps an achievement in 2010.

Price, though, has been sacrificed to get growth among those harder-to-find market segments (as one can see with Chatr’s unlimited plans). Analysts see flat to negative trends on average revenue collected per subscriber again this quarter, even as more people convert to smartphones and rack up data charges.

“With data substitution and competition in voice services intensifying, we estimate voice revenue decline continued to accelerate,” Phillip Huang at UBS said in an Oct. 14 note.

Mobile repricing — contained to voice services for now — underscores how new competitive threats are changing market conditions, as well the relative maturity of the wireless industry. Flat to lower revenue trends are now forcing Rogers, Bell and Telus to ramp up efforts to grow home broadband and TV subscriptions.

Bell, which is expected to report earnings of 74 cents a share on $4.496-billion in revenue, introduced its Fibe TV and Internet packages in Toronto and Montreal in the quarter, preceded by the launch of the Optik bundle by Telus in June. Both firms are banking on the bundles to offset wireless pressure going forward and analysts will be looking for an indication on how the new products are being received.

“We will be looking at Telus’s TV additions again this quarter to gauge whether the Optik IPTV offering is gaining momentum,” Maher Yaghi at Desjardins Securities said.

Mr. Yaghi estimates that about 30,000 subscribers were won by Telus (EPS of 73 cents on revenue of $2.469-billion) in the quarter, in line with the pace of acquisitions this year. It means chief Western Canada rival Shaw Communications Inc. will see a modest 2,000 reduction in its cable base, he and other analysts believe.

Bell just began selling Fibe in Rogers’ home market of Toronto in September, but may have had an impact its cable foe already, RBC’s Mr. Allen said.

“Our checks have found that Rogers has been actively contacting customers and offering large discounts,” he said. “It’s motivation is likely a desire to secure its customer base against Bell’s IPTV.”

These small-scale chess moves have had little influence over share values though, nor are they expected to after Rogers, Bell or Telus reports. With strong wireless performances and investors growing thirst for stable dividends, “we expect the recent moment in the stocks to continue for the rest of the year,” Mr. Yaghi said.

There are more bearish takes though.

“Canadian telco stocks are amongst the most expensive in the world,” Dvai Ghose at Canaccord Genuity wrote in a note this week. “We reiterate our fear that that we may be seeing a bubble develop ... that has been driven by an indiscriminate thirst for yield.”

He sees significant challenges that have perhaps gone undetected by the market, not least “unprecedented” discounting on wireless in recent months. Regulatory risks remain as well, with a review of foreign ownership rules now underway within Industry Canada that could hand new entrants big advantages in accessing foreign capital.

Whatever the impacts of the underlying shift will be, analysts say Canadian incumbents seem to be enjoying a relative sweet spot. The same can be said for their investors.

Financial Post
jasturgeon@nationalpost.com

Quebecor paces acceleration of wireless wars

Jamie Sturgeon | Financial Post | Sept. 6, 2010

TORONTO -- When Vidéotron Ltée chief executive Robert Dépatie confidently beamed this past spring that his Quebecor Inc. telecom division was “on the verge of launching Quebec’s most competitive and complete wireless service,” many believed a splashy launch was imminent.

June gave way to July, then August. It is now September, and Quebecor is ready for take-off, saying in a company release today service will be turned on Thursday.

Start your engines.

As the first of two well-entrenched cable incumbents to bring on wireless services this year and next, Montreal-based Vidéotron’s long-awaited entrance into Quebec’s wireless market represents a significant shift for the industry.

Analysts are taking Mr. Dépatie’s words seriously, and so is the competition. “Long-term, Vidéotron has great potential to make a lot of money out of wireless in Quebec,” Maher Yaghi at Desjardins Securities says.

He and others expect the firm to begin immediately stealing market share from wireless incumbents Toronto-based Rogers Communications Inc., BCE Inc.’s Bell Mobility, also of Montreal, and Vancouver-based Telus Corp. through a strategy built around bundling affordable mobile services into household cable, Internet and phone products Vidéotron already sells to its 1.8 million customers.

The company will offer 30-40% discounts to the incumbent wireless operators’ voice and data pricing in Quebec if customers take wireless as part of a bundle, Dvai Ghose, analyst at Canaccord Genuity said in a note Tuesday.

"[The] aggressive wireless price points ... will force Bell, Rogers and Telus to respond," he said.

Most stock analysts following Quebecor like Vidéotron's chances. Of 13 covering the firm, 10 rate it a “buy” or “sector outperform,” according to Bloomberg. Three, including Mr. Yaghi and analysts at TD Newcrest and Credit Suisse, rank the shares as a “hold.”

Vidéotron cut its teeth in wireless in 2006 when it partnered with Rogers in a resale deal that slapped its branding on phones that ran over the incumbent’s network.

But since paying Industry Canada more than half a billion dollars to secure its own wireless licences in 2008 and constructing a 3G+ network across its wireline territory, the most important growth engine for Vidéotron is now ready for prime time.

Mr. Yaghi conservatively suggests Vidéotron will win 45,000 customers before the end of the year, and will have attracted 165,000 through 2011. Combined with its existing 87,000 wireless clients — equal to about 2% of the Quebec market — Vidéotron will boast a subscriber base of a quarter of a million customers 15 months from now.

With nearly 40% of Quebec’s 4.3 million wireless customers toting a Bell device, it is no surprise the cross-town giant has been aggressively courting Quebeckers with discounts on Internet and TV alongside home-phone. It is part of Bell’s strategy to win the entire “broadband home” away from Vidéotron. Instead of the pesky cableco stealing its wireless business, Bell will take Vidéotron’s Internet and cable accounts, and if it can, reclaim home-phone customers, too.

"You'll see much more product and marketing development towards owning the entire household over the coming period," Kevin Crull, chief of Bell's residential services said in an interview last week.

Irrespective of whoever wins this tug of war, industry-wide disruption is expected.

Pricing has been guarded like a state secret. But there are good odds that Vidéotron will introduce some form of unlimited calling. There are ads floating around Quebec now suggesting customers will no longer have to fret over how many minutes remain on their plan.

If true, it could hold huge ramifications not just for major rival Bell, but the sector. So far, incumbents have steadfastly resisted introducing any unlimited options in their main brands, which consist of hugely profitable users paying high prices for buckets of minutes and data, usually shackled to a contract.

It is a cash cow Vidéotron now threatens to undermine in its bid to win share in Quebec. “If Vidéotron comes out and offers unlimited local calling, that could be a game-changer,” said one analyst who asked not to be named.

“Bell can’t stand still and not offer it,” he said. “And if they do it in Montreal they’ll have a hard time not doing it in Ontario.”

An unlimited offering from Bell in Ontario may provoke a swift response from Rogers, threatening to dent wireless earnings at both firms. With almost 50% share in Ontario, it is Rogers' most important wireless market.

Telus, the No.3 carrier in the country, is the incumbent with the least amount of exposure in Quebec (or Ontario for that matter), meaning it does not face the level of immediate pressure Rogers or Bell do. But with Calgary's Shaw Communications Inc. preparing to integrate wireless services with its household bundles next year, a similar scenario awaits in Western Canada, as well.

China's Huawei looks on Ottawa to smooth entry into US market

Jamie Sturgeon | Financial Post | Aug. 28, 2010

Huawei Technologies Co. may be looking to the city of Ottawa and the domestic telecom market to help ease tensions between the Chinese network-maker and Washington.

Huawei strengthened ties with the city by taking membership in tech incubator Ottawa Centre for Research and Innovation. The move follows the opening of research labs in the region this spring and a commitment of $50 million to R&D.

Huawei's immediate interest in Canada stems from contracts with BCE Inc.'s Bell Canada, Telus Corp. and SaskTel. But the deepening connection likely holds another motive, analysts suggest -- establishing a beachhead for entry into the United States, a market the Chinese firm has coveted for years but has faced stiff opposition from some U.S. lawmakers.

"Their eyes have been set on cracking the (U.S.) telecom sector forever," said Jon Arnold, principal analyst at Arnold & Associates Ltd. in Toronto.

The need for Shenzhen-based Huawei to make inroads in North America is increasing. In the last year, chief competitors have taken major positions in Canada as U.S. carriers move to upgrade mobile networks and Canadian providers such as Bell, Telus and Rogers Communications Inc. prepare to follow suit.

Last summer, Sweden's Ericsson AB, the largest telecom equipment maker in the world, outbid European rival Nokia Siemens Networks for Nortel Networks' wireless division. In July, NSN enlarged its presence by gobbling up Motorola Inc.' s network operations (and was rewarded with a $7-billion U.S. deal from Harbinger Capital Partner to build a next-generation network).

Huawei's biggest opponents may reside in Washington, where deep skepticism persists over the company's rumoured ties to Chinese military, among other allegations.

Last week, senior Republicans advised the White House to block Huawei from supplying Sprint Nextel with network equipment because of national security concerns. Similar warnings forced Huawei to drop a bid for 3Com in 2008.

"Every time they've tried to gain entry into the American market, they've been almost completely unsuccessful," said Lee Ratliff, analyst at iSuppli Corp.

Now, Huawei is pursuing deeper ties in Canada. Since winning contracts with Bell and Telus to build their joint 3G+ network last year, the firm established R&D facilities in Ottawa in April. It is hiring from the talent left behind from Nortel's departure.

Membership into OCRI gives Huawei "an opportunity to show they're committed and here for the long term," said Claude Haw, chief executive of the regional trade body. Fellow members include Telus, Rogers and Research In Motion Ltd.

Yet some, like Arnold, see the aim of the moves as a way to smooth relations with the United States. By establishing a record north of the border, fears may be allayed, he said.

-30-

Newser: Wireless startups taking share from Rogers, Bell, Telus: report

Jamie Sturgeon | Victoria Times-Colonist | July 28, 2010

TORONTO -- Canada’s new wireless providers are luring subscribers from incumbents Rogers Communications Inc., Bell Canada and Telus Corp., rather than attracting customers who are picking up a cellphone for the first time, according to one of the first detailed looks at the new competition.

The revelation, among other developments, may revive concerns among investors that upstart players will wreak more havoc in the country’s traditionally staid $16-billion mobile market than has been assumed, while the established firms are likely to hit at their own bottom lines to guard market share, analysts say.

“Hide from wireless,” Jeff Fan at Scotia Capital recommended to clients in a note published Monday. “We expect competition risk.”

About three-quarters of all subscribers with Wind Mobile, Mobilicity and Public Mobile have been cherry-picked from the three major incumbents, a report from Scotia Capital says. It is a higher percentage than some thought would prevail, and could contribute to more aggressive efforts to retain customers at Rogers, Bell and Telus, which together currently control about 96% of the wireless market.

One rumour is that Rogers is set to introduce a new discount brand called “Chat.r.”

Rogers’ new brand would be aimed directly at the area in which new entrants are having the most success: low-income, city dwellers and immigrant communities that want cheap, unlimited voice and text services.

Chat.r will launch during the all-important back-to-school season, typically the highest selling period for a carrier alongside Christmas. Unlike Rogers’ current discount brand Fido, the new service will be completely prepaid with no contracts, closely mirroring the most attractive plans offered by the three new entrants, sources said.

Chat.r will stem subscriber losses for Rogers but at a price. The telecom behemoth will take a hit on the average revenue per user (ARPU) it generates per month, which currently stands at $62.02, the highest among Canadian carriers.

Rogers declined to comment on Chat.r.

“We’re always working to innovate and better serve Canadians, but have nothing to announce at this time,” said Odette Coleman, Rogers’ director of communications.

A new launch would have broad implications for the market. Bell and Telus will almost certainly move to match any repricing while new entrants will also react, threatening all with a punishing price war. “Our concern is that it will ignite retaliations,” Mr. Fan said.

After much uncertainty and — unfounded — anxiety last year, the market has mostly dismissed the new-entrant risk through fiscal 2010. Rogers, Bell and Telus have all seen their stocks rally (as much as 20% in Telus’s case) as ARPU has stabilized and performances have rebounded against weak year-ago comparables.

There may be room left in the run-up as solid second-quarter results are expected again at the end of the month. Yet after that, valuations will be hard-pressed to justify such levels, some say.

“We urge incumbent wireless investors not to be complacent,” Dvai Ghose, analyst at Canaccord Genuity said in a note late last week. The analyst also foresees downward price pressure ahead, especially in Eastern Canada.

In Quebec, Vidéotron Ltée. will launch wireless at the end of summer with aggressive discounts, particularly on data plans which could come in 40% cheaper than current incumbent pricing. Vidéotron operates in Montreal and surrounding areas, but a price cut there could prompt restive customers in other areas to barter for the same.

“Rogers and Bell are particularly susceptible as they enjoy industry leading market share in Ontario and Quebec,” Mr. Ghose said.

With the ability to bundle Internet, phone and TV services, Videotron is expected to experience more sustained success in the wireless market than Wind, Mobilicity or Public Mobile. Despite garnering most of their customers from incumbents, new entrants are believed to be tracking below their own estimates and even the more tempered expectations of analysts.

All four firms won licences to operate cellphone businesses at the 2008 wireless spectrum auction. Wind has been rolling out services across Canada since its December launch, while Mobilicity and Public Mobile began operating in Toronto in May.

jasturgeon@nationalpost.com

Earnings preview: Telecoms before the storm

By Jamie Sturgeon | Vancouver Sun | July 25, 2010

With the economy sending mixed signals, markets have been dicey for months. But there have been pockets of calm, and in particular Canada’s telecom sector, which has enjoyed steady gains against the S&P Canadian benchmark index in 2010.

Investors should not be surprised. For years now, wireless profits have fuelled enviable cash flows and solid earnings growth at Rogers Communications Inc., BCE Inc. and Telus Corp. In recent quarters, each firm has diligently spun out more and more cash to stockholders in the form of dividend hikes while Rogers and Bell have been busy buying back shares, making owning one if not all three a must for value seekers.

As Rogers kicks off second-quarter earnings season this week, the good times are expected to continue. “It will be relatively consistent for the big three,” Phillip Huang, analyst at UBS says, echoing the consensus view on Bay Street.

But good times have a history of ending and some, including Mr. Huang, believe the horizon on the sector’s safe-haven status appears fast-approaching.

“I would characterize it as the calm before the storm, especially if you’re looking at the wireless side,” he said.

The reason for the growing pessimism stems from fresh competition from stalwart cable firms now arming themselves with wireless, and cellphone startups that have recently entered market. Both forces threaten to dent the sector’s impressive cash-generating powers in the second half of the year, some say, and beyond.

On Tuesday, Bay Street expects Rogers to report earnings of 67¢ a share on revenues of $3.026-billion. One focus will be on wireless profit margins, which are expected to continue to fatten. Rogers has been the most aggressive of the big three telecoms in marketing smartphones to existing subscribers and new customers. It was the exclusive Canadian provider of the iPhone up until last November, and as more subsidy costs on expensive handsets are made back, margins are expected to rise among those users, which accounted for a third of its eight-million-plus base in the first quarter.

Many expect that higher mobile data revenues will help Rogers sail past Street estimates and adjust its outlook higher.

“Based on stronger wireless margins, we believe RCI will tweak and raise 2010 guidance this quarter,” Jonathan Allen of RBC Capital Markets wrote in July 7 note.

But margin gains reflects slowing growth. Wireless margins are rising because the amount Rogers is spending to subsidize new smartphones is decreasing as fewer new customers are signed up. New competition from the likes of Wind Mobile may be having some effect in core marketssuch as the Greater Toronto Area. But BCE’s Bell Mobility, once the third-place runner in wireless, is likely the greater concern for Rogers.

Bell has been steadily gaining ground since activating its new wireless network last fall, and is again expected to show robust customer additions when it reports on Aug. 5. A marketing barrage led by its sponsorship of the Vancouver Winter Games led to a blockbuster first quarter. Wireless additions are expected to moderate, but Bell may still add as many as 100,000 new subscribers in the spring compared to 90,000 at Rogers.

“Bell will again win market share away from Rogers. New entrants, as well, but to a lesser extent,” Dvai Ghose at Canaccord Genuity said.

The downside is that Bell faces a period of cost pressures as subsidies for iPhones and BlackBerries will be heftier than peers. But Bay Street expects Bell to report profit of 73¢ a share and revenue of $3.78-billon. Another 5% hike to the dividend to $1.83 is almost a lock, following a 7% hike at the end of 2009.

The leveling playing field in wireless between Bell and Rogers also sets the stage for a fierce battle for television subscribers once Bell introduces its new IP television product in Toronto and other markets this year.

As for Telus, the market will be watching whether a very promising start to the year can be maintained when it reports on Aug. 6. RBC’s Mr. Allen called Telus’s first-quarter performance a “turning point” as it recovered from a bruising 2009 which saw wireless revenues per subscriber fall the sharpest among the big firms, and intense competition from Western Canada cable giant Shaw Communications Inc. accelerate home-phone customer losses.

“Telus was arguably the hardest hit by the economy and competition last year,” Mr. Allen said.

But now Telus is hitting back. An aggressive roll out of its rival IP-based television and Internet product bundle, called Optik, is seeing gains against Shaw, and the benefits of cost-cutting efforts have started to pay off. The Street expects the Vancouver-based firm to report 76¢ a share in profit on $2.42-billion revenue and a performance in line with the high end of its full-year guidance.

Telus shares have climbed the highest among the big three this year, appreciating more than 20%, compared to gains of 9% and 13% for Bell and Rogers, respectively.

Average monthly revenues collected per subscriber (ARPU) are also expected show stabilization. Competitive pressures and lower overall usage because of a dismal economy saw voice fees cut last year and data usage fail to make up the difference.

“Declines are going to be much more modest this quarter than what we’ve seen,” Canaccord’s Mr. Ghose said.

Greg MacDonald of National Bank Financial said the quarter will show that wireless data revenues are beginning to buoy and even lift overall ARPU levels at the big three, even as they continue to lower pricing on mobile call charges due to new competition. “I’m looking for flat blended ARPU because of the data growth you’re seeing, despite high single digit erosion on voice,” he said.

Picking a winner among Rogers, Bell and Telus for the quarter can be debated. Investors have flocked to all three this year to take advantage of healthy dividend payouts that are second-best among Canadian stocks as a group (5.5% on average vs. 5.6% among utilities), and have steadily risen.

“All three have done really well,” Juliette John, portfolio manager for Bissett Investment Management’s dividend funds. She manages $750-million, of which 12% is spread across the three telecoms. “They’re considered a bit more conservative and that has become much appreciated I think. And of course that yield is really attractive.”

What cannot be argued is that they all face intensifying competitive pressure going forward, with no consensus on what the impact will be. “If equity markets remain volatile, then a position in telecom for another couple of months may still be attractive,” Mr. Allen said. “But we recommend that investors consider trimming positions as the year progresses.”

Rogers announced at the end of June it would launch “chatr”, and new discount brand to rival offerings from Wind and other upstarts Public Mobile and Mobilicity, which began offering services in key markets in May. Chatr would also preempt a wireless launch from Quebec cable power Videotron Ltee. this summer, and Shaw next year.

The fear is that the move will provoke aggressive responses from Bell and Telus, and perhaps trigger a price war, dragging down profits across the $16-billion sector.

“I’m not so much concerned about the standalone new entrants, even Videotron and Shaw,” UBS’s Mr. Huang said. “The real worry is about what the incumbents do to themselves.”

Canada’s wireless market is maturing and as the race for the last subscribers ensues, margins and revenues may be sacrificed to guard and gain share. Marketing costs are expected to soar in the current quarter.

Some, like Canaccord’s Mr. Ghose say the competition is having a greater effect than is realized. “I believe the new entrants have taken more share than what equity markets think,” he said.

Still, all three have the wherewithal to continue raising dividends and buying back shares. Dips in valuation in the coming months can even provide buying opportunities, Bissett’s Ms. John said.

“New entrants could create hiccups, but that could serve as buying opportunities,” she says, “depending on how aggressive all of the players become.”

-30-