BUSINESS

IS ‘MISTER 50 CENTS’ RUNNING OUT OF TIME?

After four years, CEO Michael Sabia is still trying to fix Bell Canada

COLIN CAMPBELL August 28 2006
BUSINESS

IS ‘MISTER 50 CENTS’ RUNNING OUT OF TIME?

After four years, CEO Michael Sabia is still trying to fix Bell Canada

COLIN CAMPBELL August 28 2006

IS ‘MISTER 50 CENTS’ RUNNING OUT OF TIME?

After four years, CEO Michael Sabia is still trying to fix Bell Canada

BUSINESS

COLIN CAMPBELL

Earlier this month,

Bell Canada announced yet another round of lacklustre quarterly results. Profits were down, the company said, and it was continuing to bleed traditional phone customers— several hundred thousand of them in the past few years. While the results were unimpressive, they were also predictable. For four years, Michael Sabia, CEO of Bell and its parent company BCE Inc., has been battling to transform a slow-moving former monopoly into a modern telecommunications company, but the results have been frustrating. Now questions are arising as to just how much time Sabia has left to turn the ship around.

BELL LOST 324,000 PHONE CUSTOMERS TO INTERNET-BASED RIVALS IN

For 100 years, Bell’s unrivalled network of copper cable was its greatest asset. But in a matter of just a few years, it has been rendered all but irrelevant. Bell’s hold over the industry has been obliterated by the sudden rise of Internet-based telephones and the rapid shift toward wireless devices. Competitors like Rogers Communications Inc. (which owns this magazine) in Ontario, and Vidéotron Liée, in Quebec, as well as other Internet phone providers like Primus and Vonage, are not just nipping at Bell’s heels, but chomping at its throat. And in the fastest-growing segment of the industry—wireless—Bell is surrounded with still more competition from Rogers/Fido, Telus Corp., and, as of last week, Vidéotron.

If there has been one bright spot in the past year, it occurred last October, with Bell’s announcement it had hired George Cope away from Telus as its new chief operating officer. For Bell, it was a coup. “We worship him,” says one analyst of Cope’s reputation in the industry. In Cope, analysts see an executive capable of boosting Bell’s position in a fast-changing industry. Before Telus, Cope spent 13 years as the head of wireless operator Clearnet. But his hiring, while celebrated at Bell, may also signal bigger changes on the horizon. Namely, the beginning of the end for Sabia’s tenure at BCE.

After four years of trying to restructure and refocus Bell Canada, Sabia’s time appears to be running short. The changes he has made at Bell since 2002 may well have saved the company, but the incumbent is still being outperformed by smaller rivals in key areas like wireless, say analysts. “People are impatient with Sabia,” says one. “People are waiting for him to leave and George Cope is obviously seen as the successor.”

If shareholders and analysts are getting antsy with Sabia and his failure to deliver a quick fix, they are also sympathetic. Sabia joined Bell Canada in 2002, taking over a company that might have best been described as an already half-sunk battleship. Under his predecessor, Jean Monty, Bell had embarked on the now-discredited strategy of convergence—buying properties like television network CTV Inc., online commerce

company Emergis Inc., and a piece of the Globe and Mail. Sabia was charged with dismantling all that and refocusing the company on its “core business” of telecommunications. “His first major problem was the financial basket case he was left with,” says Eamon Hoey, a telecom consultant and senior partner with Hoey Associates. “It created a huge hangover for almost his entire period.” Sabia moved to get rid of BCE’s bolt-on companies: Yellow Pages, Teleglobe, CGI, and more recently the majority of its stake in Bell Globemedia. “It would be tough for anyone to do anything else but what he has been doing,” says Greg Eckel, senior vice-president at investment management firm Morgan Meighen & Associates.

One might have expected that all those asset sales and spinoffs might have reignited enthusiasm for the stock. But it has done virtually nothing. When Sabia took over from Monty on April 24, 2002, the stock was at $2755 per share. Today it hovers around the same range, about $26.50 a share, earning Sabia the nickname “Mr. 50 Cents” among many analysts and investors on Bay Street.

One of the reasons for this lack of growth, analysts say, is that the industry is transforming much faster than most expected, and faster than a big old company like Bell can easily cope with. Bell has suddenly had

to contend with cable companies offering telephone service through the Internet (a technology called VoIP, or voice-over-internet protocol). “It’s a changed environment,” says Eckel. “At a time when they’re coming back to their core business, their core business is all of a sudden under attack.” In November, Dominion Bond Rating Service downgraded Bell Canada’s rating largely because of its ongoing loss of customers to cable companies. Last year, Bell lost 324,000 traditional phone customers. This year, it is on pace to lose as many as 400,000. For the past three years, those losses have been accelerating. “We’re managing the erosion of our traditional business better,” said Sabia, after the company announced its secondquarter results this month. Bell may be coping with erosion, but the loss of customers is still very costly and undermines efforts to build a base for future growth, analysts warn.

By merely maintaining the company’s stock price at a base level, Sabia has been running

hard to stand still. On top of its declining traditional phone service, Bell’s wireless division trails rivals like Rogers and Telus. Last week, Vidéotron, which has already made big inroads in Quebec with its VoIP service, launched a wireless service that will run on the rival Rogers network. Bell’s satellite TV service ExpressVu has done well, but there too, cable companies offering enhanced digital service and high-definition signals are beginning to regain lost ground.

Bell has also made a few costly stumbles, say analysts. Most noteworthy was in 2004, with its quickly aborted plan offering 1,000 minutes of long distance for $5 in Ontario and Quebec. The plan had the effect of pushing down prices in advance of competing VoIP service; in a sense, Bell started its own price war before the real threat had even arrived. Pricing has also caused problems with regulator CRTC, which has prevented Bell from lowering prices to compete with cable rivals like Vidéotron. Finally, Bell ran into difficulty changing its customer service system in 2004. Some customers went months without a bill, then received one for hundreds of dollars and refused to pay. Customers were alienated, and some charges had to be waived. As a result, Sabia declined his bonus that year and has since made customer service a top priority.

All this has put added pressure on Bell to slash costs (as much as $2 billion by the end of 2007), and jobs (as many as 4,000 jobs this year), while also converting more of its network to newer, cheaper VoIP technology. These moves have been welcomed by analysts, but have failed to budge the stock price or create a lasting sense of optimism about Bell’s future. “Are we seeing a slow decline of the company or are we seeing the renewal of the company? I think the jury is still out,” says Hoey.

In a recent letter to shareholders, the company said that “building a new Bell won’t happen overnight,” and the transformation would continue through to 2009. Sabia may not have that kind of time, say some analysts. Cope, they note, did not leave Telus (a company with a seemingly bright future) to wallow in the COO position at Bell forever. “Even the best poker player could not be expected to win every game with that hand,” says one analyst about Sabia’s tenure at Bell. “But George Cope is a much better player. That will manifest itself.” The voices of discontent haven’t started openly calling for Sabia’s ouster yet, but with Cope comfortably settling in to the CEO-in-waiting position, and his close colleague from Telus, Wade Oosterman, also joining Bell recently as president of Bell Mobility, it appears at least some of the leadership mantle has already been passed. M