Convergence has been a “financial misadventure” in Canada, author says

Torstar Corp. is looking pretty good as the financial repercussions of ill-conceived convergence plans coupled with a downturn in the advertising market are currently squeezing big media players in the country, according to the author of a just released book on convergence in the Canadian media. "I tell you who looks really good right now – The Toronto Star – the most unsuccessful convergence player of all," says Gordon Pitts, a business reporter with The Globe and Mail and author of Kings of Convergence: The Fight for Control of Canada’s Media. But while he has many criticisms of convergence strategies, he still sees benefits in convergence, and feels that some form of convergence will survive, although it may be called something else. His chief complaint centres around financing. "It was a financial misadventure for a lot of these companies. It was crazy to pay what they did for a lot of these acquisitions. They paid at the top of the market, and they were caught in the feeding frenzy," he tells Canadian Communications Reports. "They should never have invested so much on something which they had no idea what the outcome would be. The main lesson of the book is that it was entirely foolhardy to spend billions on a newspaper chain, or for CTV, when there was no real business model." He adds, "What should have been done was small projects. The Aspers (of CanWest Global Communications Corp.) could have bought one newspaper and tried out some of this stuff. Instead, there was this sense that they had to own it because someone else would own it. Plus, the whole psychology of early 2000 was sort of mass hysteria." Pitts’ comments come amidst praise from some Americans at the Canadian Association of Broadcasters (CAB) convention last month for attempts by Canadian companies at media-cross ownership, coupled in some instances with control of the pipes. For example, New Yorker David Bank, of RBC Capital Markets, said that American companies coveted convergence through multi-platform ownership even though the Canadian experiment was floundering. But Pitts believes that convergence can work through partnerships rather than through outright ownership. "To feel you have to own the asset to make it work – that’s where (former BCE Inc. chair and CEO Jean) Monty was wrong," he says. Asked which of Canada’s media players attempting convergence have been the "smartest," Pitts replies, "they have all been dumb. It’s the financial convergence that they have been dumb on." He lists some of the mistakes: CanWest bought too many newspapers at too high a price; BCE also paid top price for CTV Inc.; Shaw Communications Inc. shot itself in the foot when affiliate Corus Entertainment Inc. bought Nelvana at the peak; Quebecor Inc. made the mistake of agreeing to an all-cash deal for over-priced Vidéotron ltée, and while (Rogers Communications Inc. president and CEO) Ted Rogers didn’t pay too much for the Toronto Blue Jays, he bought a sports property that doesn’t have a big enough core following. "The Jays lack the cachet of the Toronto Maple Leafs. When the popularity of your team is declining, it’s hard to make your convergence play work because nobody cares. But when you have an iconic team like the Leafs, there is potential for something like that," Pitts concludes. He says that many of Canada’s overextended media companies will be forced to sell off the assets they acquired as part of their convergence strategy. Crippled with debt, CanWest Global this summer sold its community newspapers and related assets in Atlantic Canada and Saskatchewan to G.T.C. Transcontinental Group Ltd. for $255 million in cash (CCR Update, July 10/02). That’s a wise strategy, according to Pitts, whose research suggests that CanWest only needs to own newspapers in the bigger cities of Edmonton, Calgary and Toronto. He points out that new BCE president/CEO Michael Sabia is less committed to Monty’s convergence strategy and predicts that Bell Globemedia will be sold so that the parent company can return to concentrating on its core telecom assets. He notes that cash-strapped Quebecor has no choice but to unload some of its media assets because even with a friendly financial backer in the Caisse Populaire, it can’t continue to function with its current level of debt. "Companies like Quebecor are very stretched right now, and some will totally disband the convergence strategy," Pitts predicts. Yet he still sees benefits in convergence, and feels that some form of convergence will survive. Although Torstar is faring well at the moment in terms of its balance sheet, Pitts notes that at the end of the day it’s still solely a giant newspaper with little room to grow. The same holds true for Montreal-based Astral Media, which has concentrated on pure play rather than converged play. These companies will eventually have to diversify or find partners, he notes, if they’re going to grow or compete, particularly if the communications industry opens up and becomes less regulated. "Even though convergence has gone out of fashion now, the big question is ‘how do you grow?’ And once you get back into a more reasonable economy, what do you do then?" Pitts asks. A consultant to BCE on its convergence strategy tells CCR that the current anti-convergence sentiments are a bit misguided. "It’s a bit like taking a shot at Britney Spears – it’s really easy. The problem is that convergence will take time," the consultant says, noting that the infrastructures of the various BCE companies have never really merged, and have continued to operate as separate fiefdoms. Pitts sees real benefit in offering consumers bundles of products, and in the sharing of news and information by the same reporter across multiple platforms. So while he’s convinced that convergence, at least for the time being, is dead from a financial perspective, it will still carry on in operational manner – and possibly under another name. And eventually, there will once again be more acquisitions. The way that people acquire information in the future is going to change, and a converged media company may be able to better deal with those changes, according to Pitts. "It makes sense to look at ways to deliver this information through the Internet, telecommunications, and satellite. But frankly, these are experiments; these are labs. And you don’t spend billions on a laboratory; you continue to play around the edges." Pitts further notes that Canadian companies will need the added clout of a converged model if global communications borders fall. "In the end, they may see no choice but to succumb to the wave of globalization, as their communications empires surrender control to foreign partners or acquisitions. But some Canadian players may yet become the eaters instead of being eaten," he writes in his book.

Convergence has been a “financial misadventure” in Canada, author says

Broadcast | November 7, 2002

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