BUSINESS

TO HOOK A NATION

Telephone and cable firms vie to wire homes

BRENDA DALGLISH April 10 1995
BUSINESS

TO HOOK A NATION

Telephone and cable firms vie to wire homes

BRENDA DALGLISH April 10 1995

TO HOOK A NATION

BUSINESS

Telephone and cable firms vie to wire homes

The young violist featured in a video demonstration for the Canadian Radio-television and Telecommunications Commission sounded like a typical music student. He screeched and squawked his way through practice until his mother reminded him that it was time for his lesson. Instead of leaving home, the boy switched on a television and “met” his teacher in a two-way hookup. According to the telephone companies that produced the video, such interactive music lessons are among the innovative services that will one day be available on

the information highway—as long as the CRTC gives them the green light. "The next five years will be the most important period of change in the history of this critical Canadian industry,” Bell Canada president John McLennan told the commission, which ended a month-long hearing on new communications services in Hull, Que., last week. “Do not hold back the telephone companies or any other potential competitor. There is much to be done.” Canada’s cable television industry was quick to take issue with the telephone companies’ vision. Ted Rogers, the president of

Rogers Communications Inc., which includes Maclean’s among its many holdings, advised the commissioners not to become too enthralled by the “science-fiction gadgets” to come. “My experience over the years,” said Rogers, when asked for his own ideas about the future, “is that evolution is much more likely than revolution. And these things always take a lot longer than you expect.” He added that the most dramatic change he expects in the future is that people will ultimately spend as much time on their home computers as they now spend watching television. “It’s going to take time—like a couple of generations,” said Rogers, “before their being comfortable with computers is going to develop into revenues for us.”

Differences of opinion between the telephone and cable companies are nothing new, of course, but in the past it has usually been the cable industry that has led the charge for new services and reduced regulation. This time, however, it is the telephone companies that are painting exciting visions of the future, while the cable companies drag their heels. The reason for the switch is that the issue now before the CRTC is the telephone giants’ desire to break into cable—a request that, if successful, would set the stage for an aggressive David and Goliath battle for dominance in the coming era of homebased interactive communications.

Meanwhile, the list of casualties continues to grow from the first major competitive confrontation between telephone and cable in the long-distance telephone market. Last week, Bell announced plans to slash its 46,000-member Ontario and Quebec workforce by 10,000 people over the next three years. Bell employees are the latest to take a hit in the war that broke out in 1992 when cable and other communications companies began full-blown competition with the telephone companies. Now, both are bloodied and bruised. In some cases, profits are falling; in others, losses are mounting. And both industries are rushing to slash jobs in order to lower costs. Meanwhile, some observers say that consumers should not expect much from the latest CRTC hearing. "This is merely a reslicing of the Canadian telecommunications pie by the telephone and cable company elites,” said telecommunications analyst Eamon Hoey. “It’s a reshuffling of revenues. The only difference this is going to make to consumers is where they send their cheques.” Still, most analysts say that the telephone companies are almost certain to get the go-ahead for their planned assault on the cable industry, because their request fits with the commission’s recent preference for competition over regulation. As a result, before the end of the decade the telephone companies will likely begin offering a selection of television channels similar to those now available from local cable companies. Initially, the telephone companies would offer this new service by using the cable companies’ existing network of coaxial cables, just as the long-distance competitors now use the telephone companies’ local wires. By repackaging the existing channels—for example, by grouping the arts or sports channels together and offering them as a single-option package—the telephone companies would try to lure away those customers dissatisfied by the cable industry’s offerings. In the longer term, as the competition heats up, the two industries would likely offer a variety of interactive services, including home banking, home shopping and video-game channels— perhaps even interactive music lessons.

But the real target of the telephone companies is the business market, where the telephone companies believe they can tap lucrative new sources of revenue. In turn, that money will be needed to help pay the $8 billion that the telephone companies estimate it will cost them over the next 10 years to upgrade their lines and to connect the existing telephone and cable networks across the country.

The heavy cost of building those network links is coming at a time when the revenues of both telephone and cable companies are under pressure. Bell Canada’s profit fell to $721 million last year from $931 million in 1992, the year that long-distance competition began. McLennan predicted last week that Bell’s earnings will drop to $500 million by the end of this year. The main reason for the decline is the recent rapid plunge in long-distance rates.

At Unitel Communications Inc., the long-distance company owned by Rogers, Canadian Pacific Ltd. and U.S. phone giant AT&T, the situation is even worse. Unitel, the largest of the country’s 150 long-distance competitors, lost $239 million in 1994. Rogers holds an option to purchase CP’s 48-per-cent stake in Unitel, which he says he will exercise by April 28 if the company can reduce its costs. He told the CRTC hearing on March 23 that Unitel’s recent cost-cutting measures are beginning to show results. But Rogers said that Unitel, which has reduced its own workforce by almost 1,000 people to 2,700, will never be profitable without rate changes that will reduce the amount that it pays the telephone companies for the use of their long-distance lines.

Although the experience in the long-distance market has cost both new and old telephone competitors money, others remain enthusiastic about the benefits of competition. Ian Morrison, spokesman for Friends of Canadian Broadcasting, says that Canadian viewers and program creators will benefit. Morrison estimates that only 12 cents of every dollar that Canadians pay to their cable companies is passed along to program creators. “If,” he said, “there is only one distribution system— the cable company—to get to the viewer, that distribution system has a lot of power. If there is another route to get to the consumer, it will put more bargaining power in the hands of the creator.”

But as the CRTC hearings wrapped up last week, one big question remained: how much more money will Canadians pay for these new communication products and services? When the CRTC introduced longdistance competition, it assumed that—following the U.S. experience—lower telephone rates would encourage consumers to spend more time on the phone. That, in turn, would result in total long-distance revenues holding steady or even increasing. With competition in the cable television business, however, there is little expectation that rates will drop significantly or that revenues will increase. And if Canadians turn out to be unwilling to pay for music lessons at home, that could have serious implications for those who want to build the information highway. Both telephone and cable companies have reason to worry that if they build it, customers might not come.

BRENDA DALGLISH