BUSINESS

Changing channels

High-tech TV threatens cable's traditional dominance

JOHN SCHOFIELD October 14 1996
BUSINESS

Changing channels

High-tech TV threatens cable's traditional dominance

JOHN SCHOFIELD October 14 1996

Changing channels

BUSINESS

High-tech TV threatens cable's traditional dominance

JOHN SCHOFIELD

One of these days, Doug Lloyd might try picking on someone his own size. Five years ago, he tried beating up on Bell Canada when he founded Telroute Communications Inc., one of the country’s first alternative long-distance telephone providers. Ma Bell proved to be a tougher competitor than he bargained for, and Telroute eventually went under. Bruised but not beaten, the feisty 44year-old veteran of Canada’s communications wars is gearing up for another battle royal. In his new incarnation as president of SelectView Cable Services Inc. of Toronto, Lloyd wants to steal business from the country’s largest cable TV company, Rogers Cablesystems Ltd. And it’s bound to be a barefisted brawl. “They’re going to fight like hell, just like Bell Canada,” he predicts. “We’re

going to have to work our little butts off to get market share.”

Lloyd—like most of the 20 or so other companies challenging the cable industry’s 44-year headlock on the Canadian TV-distribution business—plans to attack from the air. SelectView, which is still waiting for its licence, will use wireless-cable technology, transmitting digital signals from the CN Tower and other southern Ontario locations to small, flat-plate antennas installed at subscribers’ homes. A wire connects the antenna to a box atop the TV, which descrambles the digital signal for TV viewing. Direct-tohome (DTH) services, such as a longpromised offering from ExpressVu Inc., work in a similar way, but the signals are beamed from a satellite.

The Canadian Radio-television and Telecommunications Commission (CRTC) opened up the floodgates to new TV delivery

services in May, 1995, when it recommended open competition on the information highway. This week, the agency is conducting hearings in Ottawa that will help bring broadcasting regulations in line with the new entrepreneurial ethic. The CRTC has already licensed three DTH providers and one wirelesscable operator—SkyCable Inc. of Brandon, Man. Several more companies are awaiting approval. Another 13 groups will go before Industry Canada this fall seeking permission to operate wireless-cable networks—the first step before seeking broadcasting rights from the CRTC. The major phone companies are also charting their forays into TV. So far, only SkyCable is actually offering service. But the battle for the eyeballs—and wallets—of Canadian television viewers will heat up over the next 12 months as more companies come on stream.

Among the biggest winners will be consumers. While no one is prepared to predict yet how far prices will fall, savings are inevitable. In southern Ontario, the country’s largest cable market, Lloyd says SelectView will sell its basic 31-channel service for $16.95 a month. Rogers charges $19.28 a month for a 26-channel package. PowerTel TV, another wireless-cable company that hopes to start serving southern Ontario in 1998, also hopes to undercut Rogers. “I think consumers are anxious for choice,” says Ted Boyle, PowerTel’s president.

But firms like PowerTel and SkyCable are small potatoes in the eyes of the $2.3-billion cable industry. While invading some lucrative local markets, most are likely to remain minor players for several years. Ultimately, cable operators see the money and muscle of the phone companies as the real threat. “Only they will be offering the full array of communications services,” says Richard Stursberg, president of the Canadian Cable Television Association. ‘We’ll be pitted in a big struggle with them.” Bell Canada and Alberta’s Telus were among the first to announce plans to test new broadcasting and telecommunications services starting later this year and in 1997. Most of the provincial telephone companies will be licensed to broadcast TV programs by 1998, said Barry Chapman, an executive director with Stentor, an alliance of Canada’s major phone companies.

The cable industry is already scrambling

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to fend off the new challengers. “There are customers to lose, so it’s a question of making sure there are customers to keep,” says Jim Shaw Jr., the president and chief operating officer of Calgary-based Shaw Communications Inc., Canada’s second-largest cable company with just over 1.5 million subscribers. The country’s 70 cable companies will spend up to $6 billion over the next five years on upgrading their lines to offer digital TV, high-speed Internet access and local telephone service.

Meantime, the search is on for new ways to package and market services. In a sign of things to come, Rogers is peddling The Ticket, a pay TV kit that includes an analog converter/descrambler, popcorn, movie critic Leonard Maltin’s movie guide, and coupons for video rental discounts. Customers who sign up also save 25 per cent off the cost of buying pay TV programs individually, but they must agree to stick with it for a year. “The real key to survival is shifting the company from being an engineering company to a marketing company,” says Rudi Engel, an executive vicepresident with Rogers Cablesystems. “It’s that kind of marketing and consumer focus that we’re bringing to a business that hasn’t really been focused in that way since its inception.”

Many customers would agree it is high time that cable companies paid more attention to them. Critics have often accused the industry of arrogance. “Monopolies are things that people love to hate,” says Engel. “We’ve certainly made some mistakes over the years that we won’t make again.”

Ironically, the telephone companies were the architects of the dollar-spinning dominance,the cable industry has enjoyed since operators started stringing up wires in the early 1950s. Early responsibility for the burgeoning cable business ended up in the

laps of the phone companies. They spurned the TV business themselves, but allowed cable firms to piggyback telephone poles if they agreed to keep out of two-way communications. When Ottawa created the CRTC in 1968, the cable industry came under the Broadcast Act. But the legislation was designed to protect Canadian culture from foreign intrusion, not consumers from high rates, says Robert Babe, a communications professor at the University of Ottawa. Over the decades, that has guaranteed the cable industry a steady stream of healthy profits. “It’s a low-risk business, and in that sense it has earned a good rate of return,” says Babe.

Thanks to new regulations and new technology, the cable business has suddenly become a lot riskier. Compared with their American cousins, however, Canadian operators have some built-in advantages that could help them better withstand the on-

slaught. For one thing, average cable rates in Canada are 40 per cent below those in the United States, the cable association’s Stursberg says. Penetration is higher in Canada, too. About 8.1 million Canadians subscribe to cable, representing 81 per cent of homes in areas where the service is available. In the United States, the figure is about 65 per cent, says Ben Dubé, an analyst with Crédifinance Securities Ltd. in Montreal.

As a result, there is more room in the U.S. market for competition. Of the 3.7 million U.S. satellite TV subscribers, only about half were previously hooked up to cable, says Doug Shapiro, an industry analyst with Deutsche Morgan Grenfell Inc. in New York City. And many of them have kept their cable service so they can watch local channels, which are not accessible by satellite.

Still, even executives in the Canadian cable industry admit that consumers are hungry for a choice. An estimated 200,000 are already surreptitiously subscribing to U.S. satellite services. The public’s impatience with the cable monopoly burst into the open last year, when thousands of subscribers jammed cable company phone lines to complain about negative-option billing for new specialty TV services. The grassroots revolt forced the quick cancellation of the practice, which required customers to pay for new channels unless they sent in a form indicating which ones they did not want.

Not all subscribers have been transformed into raving activists. Jamie Eddy, a lawyer in Fredericton, says he is not losing sleep over the lack of cable competition. “It’s not a real thorn in my side,” says Eddy. But given the option of similar service at a lower price, he admits he would switch in a minute. “The bottom line is what you’re getting at what particular price,” he says. It’s a fundamental lesson in free-market economics that Canada’s cable TV companies are about to experience firsthand.

DIGITAL OPTIONS

Ever since televisions started showing up in consumers’ living-rooms after the Second World War, TV signals have been broadcast and received in analog format. Analog reproduces images using a continuously varying electronic signal. Newer digital technology—which conveys information using the combinations of zeros and ones recognized by computers—promises to improve picture and sound quality dramatically, while expanding channel selection. Digital TV signals will be delivered in three ways:

Upgraded coaxial and fibre-optic cables: The cable TV industry and phone companies are spending billions to construct networks capable of delivering digital TV and high-speed Internet access.

Wireless cable: Digital signals are transmitted from towers to small, flat-plate antennas, which are connected by wire to a set-top box that decompresses the digital signals.

Direct-to-home satellite: The digital signal is transmitted from a satellite to small “dish” antennas installed on a roof or exterior wall. Satellite services rarely offer local TV programming.