Telus Sitting out the Latest Wave of Convergence | The Canadian Encyclopedia

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Telus Sitting out the Latest Wave of Convergence

Three years ago, Telus Corp. chief executive Darren Entwistle and the company's board of directors were considering a bid for phone giant BCE Inc., a move that would have created a telecom colossus with annual sales of more than $26 billion.

This article was originally published in Maclean's Magazine on October 4, 2010

Telus Sitting out the Latest Wave of Convergence

Three years ago, Telus Corp. chief executive Darren Entwistle and the company's board of directors were considering a bid for phone giant BCE Inc., a move that would have created a telecom colossus with annual sales of more than $26 billion. While Telus's bid never materialized (Entwistle blamed "inadequacies" in BCE's bidding process), the fact that it was being contemplated at all highlighted the degree to which the Burnaby, B.C.-based telco was the more muscular of the two former phone monopolies, even if the Bell parent was bigger.

These days, though, Telus is increasingly being viewed as an also-ran in the fast-moving telecommunications sector. BCE's recent decision to pay $1.3 billion for the 85 per cent of the CTV television network that it didn't already own means Telus is now the only big communications company in Canada that's not in the TV content game - ROGERS COMMUNICATIONS INC. (which owns Maclean's) has CityTV and Sportsnet, Quebecor Inc. owns Vidéotron, which is launching a wireless service in Quebec, and Shaw Communications Inc. purchased the television assets of CANWEST GLOBAL COMMUNICATIONS CORP. earlier this year for $2 billion. And some are suggesting that could be a big problem for Telus if rivals start using exclusive television programs and sports content to lure new customers to their wireless and other services.

But Telus, known for its advertisements featuring all manner of cute and colourful critters, doesn't seem worried, and neither do investors. Shares of Telus barely budged on the day that BCE made its CTV announcement, and Telus's price-to-earnings ratio remains higher than Bell's, meaning investors are still willing to pay more for a share of Telus's profits. Could it be that Telus knows something its rivals don't?

"I don't think it's necessary to own content to make it accessible to customers," says Joe Natale, the company's chief commercial officer, adding that he doubts regulators will look kindly on efforts to make television and other content exclusive to a particular provider. He also questions the business case behind such deals, noting the job of broadcasters is to find as many eyeballs and advertising dollars for their programming, whereas luring wireless or INTERNET subscribers requires offering popular content - TV shows, sports coverage, news and movies - as an exclusive benefit, thereby limiting the audience. "In my mind, it's not clear that owning content outweighs the negatives of limiting the audience."

Indeed, a variation of the model has been tried before with little or no success. The last round of "CONVERGENCE" came during the dot-com bubble and featured the merger of Internet companies and traditional media conglomerates, the poster child of which was the ill-fated AOL-Time Warner merger in the U.S. In Canada, too, the convergence buzz led to the creation of media giants like Canwest, which is now in the process of being disassembled and sold off in pieces after filing for bankruptcy protection. BCE also took a stab at it by buying CTV in 2000 for $2.3 billion (the ownership stake was later whittled to just 15 per cent).

But unlike a decade ago, the walls between online and traditional media, particularly television, are finally crumbling. Thanks to file-compression technologies and widespread use of both wired and wireless broadband, it's just as easy to watch a movie or TV sitcom on a laptop or even a smartphone. "There is no doubt the landscape has changed dramatically in the last five years and, I would say, particularly in the last 24 months," George Cope, the CEO of BCE, told analysts during a Sept. 10 conference call, referring to Shaw's decision to scoop up Canwest's Global TV network and several specialty channels for $2 billion and Vidéotron's entry two weeks ago into the wireless business in Quebec. "The top three cable competitors to Bell have increased their media ownership, and all are now, or will be shortly, in the wireless business. Sports and news genres were deregulated in late 2008, and Internet and mobile TV and video is unregulated, and clearly the growth in that segment has now become very important."

Bell has already cut an exclusive deal that will allow its subscribers to watch NFL games on their cellphones. It also announced last week that CTV's business news channel, Business News Network, will also be available on mobile devices. In Quebec, meanwhile, Vidéotron is using some of parent Quebecor's French-language programming to lure new wireless subscribers.

So why is Telus content to sit on the sidelines? Natale says Telus made a strategic decision not to bid on content assets. "I would rather take the money and invest it in the innovation and evolution of our business," he says, pointing to the rollout of Telus's new IPTV (Internet Protocol television) service - which allows telcos to deliver high-bandwidth content such as HD programming as well as video-on-demand services - as an example of an area where he believes Telus can differentiate itself. "Telus has never been afraid of having a contrarian view and investing in elements of the business that haven't necessarily been in vogue."

Analysts, meanwhile, are split on whether the latest round of convergence will be any more successful than the last. Some, like Scotia Capital analyst Jeffrey Fan, have argued that Telus could find itself at a big disadvantage down the road if content truly becomes king. But others say the company was wise to keep its powder dry. "I don't think Telus is at a disadvantage," says Greg MacDonald, an analyst at National Bank Financial. "And that's because I don't think content sells wireless phones." Iain Grant, the managing director of the SeaBoard Group, takes a similar view of the mobile industry. "As a wireless customer who might want to watch things on my wireless device, I already have options like Netflix, Apple TV and other video-on-demand services. The odds that what I want to watch is included within the Bell [and CTV]-owned service portfolio aren't very large."

While exclusive sports and local news content may prove to have more pull, MacDonald says Shaw's purchase of Canwest appeared opportunistic (it saw an opportunity to take advantage of Canwest's reorganization under bankruptcy protection), while BCE's CTV deal looks defensive in nature (because its competitors were doing it). "I think owning content means [that when] something happens where distribution is not fair in the future, you've got negotiating power," he says, adding that BCE's purchase of CTV is also a hedge against potential increases in future programming costs for Bell's satellite TV network. "But it's a very big bet when it's unlikely the regulator would allow those who don't own content to be left out in the dark."

Telus is scheduled to make that very argument this week at a CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION hearing in Calgary related to Shaw's proposed purchase of Canwest's television properties. "Access to content for new platforms is a competitive imperative," Telus wrote in its CRTC submission. If Telus is successful in its gambit, it will have saved itself hundreds of millions since it will still be able to negotiate access to the content most coveted by subscribers. Meanwhile, its rivals will be charged with managing two different businesses that, for the time being, show few signs of benefitting from common ownership. And that could be enough to once again place Telus near the top of the heap.

Maclean's October 4, 2010

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