Rogers Buys Vidéotron

On Bay Street they call him the king of cable, but Ted Rogers' ambitions have always extended far beyond the television set. For years, the founder and chief executive officer of Rogers Communications Inc. has been plotting his attack on the communications empire of Bell Canada, the country's largest phone company. With last week's purchase by RCI of Montreal-based Groupe Vidéotron Ltée, Quebec's biggest cable firm, Rogers moved a giant step closer to that goal. When the deal closes later this year, Toronto-based RCI will, for the first time, control a communications network covering most of Bell's territory in Central Canada and capable of carrying not just television signals but high-speed Internet traffic and, in the near future, telephone service. "Whether it's phone traffic or Internet traffic or something else," Rogers said in an interview, "we'll have one network, just like Bell."

Both RCI and Vidéotron were at pains to portray last week's deal as a merger, but it was really the latest in a long series of takeovers in the cable industry - a trend that is almost certain to continue. Under the terms of the $6-billion acquisition, each Vidéotron share will be traded for 0.925 of a Rogers Class B non-voting share. The resulting company will have 3.7 million cable subscribers, making it Canada's biggest cable provider and the seventh-largest in North America. (Excluded from the deal is Vidéotron's stake in TVA Group Inc., Quebec's most popular television network.) Number 2 in the Canadian cable market is Shaw Communications Inc. of Calgary, with 1.8 million subscribers. And in a sign of possible deals to come, Shaw has recently been accumulating shares in what, after the Rogers-Vidéotron deal, will be Canada's third- and fourth-largest cable firms, Cogeco Cable Inc. of Montreal and Moffat Communications Ltd. of Winnipeg.

For now, Shaw says it has no intention of launching takeover bids for Cogeco or Moffat. But most analysts believe it is only a matter of time before consolidation reduces the industry to one or two large players. The biggest obstacle to any further takeovers is that each of the four major cable companies is controlled by a single shareholder or family of shareholders. Without their support, no deals can be done.

Until recently, few people would have guessed that Montreal's Chagnon family was in a mood to sell. Vidéotron's founder, 71-year-old André Chagnon, is a legendary figure in Quebec broadcasting circles, and has always been fiercely protective of the company's independence. Last month, however, Chagnon stepped down as CEO to make way for his 45-year-old son, Claude. Friends say the younger Chagnon lacks his father's entrepreneurial drive and was mainly focused on maximizing the value of the family's 36-per-cent equity stake in Vidéotron, something he clearly believes he has done by swapping the family's shares for a 12.8-per-cent stake in RCI. "It's not easy," Claude Chagnon, who will become an RCI vice-chairman, told reporters last week. "But when you have a public company, you have a duty to make decisions - good decisions like this one."

The deal certainly looks good for RCI. Having spent billions over the past decade to upgrade its cable network so that it can handle two-way transmissions, RCI is anxious to open a new front in the cable-phone wars by introducing residential telephone service in the areas it serves. Buying Vidéotron, which is already testing phone service on its network, should hasten the day when that becomes a reality. And the bigger RCI's network, the more that strategy makes financial sense, because the huge costs of launching a new service - several hundred million dollars for network enhancements alone - can be spread over a larger base of potential customers.

Despite the challenges, RCI (which also owns Maclean's) appears determined to break into the telephone business. The long-term goal, Rogers says, is to offer customers a complete bundle of communications services, including digital video, Internet access, telephone service and wireless communications. Currently, there is fierce competition in all of those fields with the exception of local phone service, which remains effectively a monopoly. "There's competition in wireless galore, there's increasing competition in video, and yet these guys [Bell] are free of competition in local telephony," said Rogers. "So if we don't get into that game and start going after them, that's where they'll bury their profits. They'll undercut us on pricing for our services, and raise the rates for their monopoly services."

RCI executives make no secret of the other major reason for the bundling strategy: the more people come to depend on one company for a basket of different services, the less likely they are to switch to another supplier. Hanging on to those customers is particularly important now that consumers can choose from a range of different video packages delivered by digital satellite and so-called wireless cable, a relatively new industry that is gaining momentum in parts of Ontario and Quebec. Increasingly, those same competitors will also be challenging Rogers Cable in the race to provide high-speed Internet access.

As for Ted Rogers, it's clear his attention is focused on the potential for further acquisitions and partnerships. At a news conference last week, he referred to the possibility of an RCI bid for Shaw Communications. "I wasn't joking," he said later. "But I think there is about an equal chance of Shaw selling as Cogeco selling. How would I rate the chance? I wouldn't want to speculate. But I'd say it's about the same."

What else is on the horizon? Given RCI's dominance of the cable landscape in Canada, it is inevitable that U.S. companies will soon venture north to inquire about the possibility of a cross-border linkup - that is, if they haven't already been negotiating. Rogers says his company isn't for sale, and in any event Canada's foreign-ownership laws would prevent the sale of anything more than a 33-per-cent stake in Rogers' cable operations. But if the price was right, such an offer would be tempting. Among the potential suitors, two stand out: AT&T Corp., the largest U.S. cable company at 12.6 million subscribers and keen to get into the local phone business, and America Online Inc., which is anxious to gain access to cable networks in order to roll out its own brand of high-speed Internet service. Less likely to bid, but still in the picture, is Microsoft Corp., which last year paid $890 million for 9.2 per cent of RCI as part of an effort to encourage the introduction of interactive TV services running on Microsoft software.

If any of those companies has serious designs on the Canadian market, it will almost certainly have to deal with Rogers. But Rogers himself claims to be in no hurry to strike a deal. In the past two years, he has reduced his company's debt to $3.6 billion from $5.6 billion; he could easily get it down to the $1.5-billion range by selling non-core assets. Meanwhile, the company's operating results are improving - although not fast enough for some analysts - and its stock is trading in the $45 range, up from $4.80 in early 1998. "We don't need any money from anybody," he said. "So now we can move our wings and expand by creating new products and new services more quickly. And also expand, if we need to, by buying other businesses." Translation: expect more deals.

Coming to Your Home

While Ted Rogers hopes to hook more customers through "bundling" communications services on one bill - from the Internet to cellphones - most Canadians still use the cable guys to watch television. Rogers and Shaw, Canada's two biggest cable companies, already market digital set-top boxes that enhance viewing with on-screen guides, pay-per-view movie ordering and digital-only channels. Down the road, however, industry analysts see many more services arriving in the home via cable.

Pay-per-view Everything

The number of movie channels is already expanding - with showings so frequent they are virtually on demand - and so is the amount of PPV sports, wrestling and special events such as blockbuster pop concerts. Can celebrity weddings be far off?

E-mail

You'll need a wireless keyboard to type efficiently, but soon your TV will be able to say, you've got mail.

The Web

High-speed cable modems already offer the Internet on computer. Set-top boxes can bring it to TV as well. As TVs get larger, people can watch TV in one window and use Web services in another. That can mean getting information about the show or, more likely, buying products associated with it. And if a Web site offers TV-like video programming, there will be a whole new source of channels, unregulated by government.

Interactive TV

Already looming. The latest CRTC call for digital channels asks for major interactive content. Whether that means shopping on-screen or voting for how a story ends will be up to the imagination of the applicants. When TV and the Web are fully integrated, watch for such ideas to explode.

Phones on Cable

You won't have to change your phone, since a standard phone wire can be connected to coaxial cable via a digital modem. If cable companies can make money at it, they'll offer it.

Talking to Your Appliances

The age of the smart appliance is arriving, ones that can be turned on remotely (preheat your oven using your cellphone) or operate when electric rates are lowest. Such household monitoring can be done over electric lines as well as cable or phone wires, but cable companies are likely to want a piece of the action.

Maclean's February 21, 2000