How do Shaw’s decisions on Canwest, mobile look today?

Yesterday's actions can have a profound influence on tomorrow. Such a notion might apply to a couple of decisions Shaw Communications Inc. has made in the last half-decade. The first of those was its 2010 move to spend $2 billion to purchase the broadcasting assets of Canwest Global Communications Corp., which included the Global TV network and several specialty channels such as HGTV, Showcase and Slice. Then in 2011, Shaw — after having spent $190 million on spectrum in 2008 AWS auction — said it was abandoning plans for mobile services and instead building a network of WiFi hotspots for its Internet subscribers. Fast-forward to today, and Shaw finds itself challenged by certain factors that would have been hard to foresee just a few years ago, such as: • New regulations to take effect in 2016 that require basic TV packages to be offered for no more than $25 a month, and later in the year compel service providers to give customers the option of picking channels on a one-by-one basis beyond that first-tier option. Not only might this affect the amount of money Shaw's TV services get from subscribers on a per capita basis, but many of its channels could struggle to win favour among consumers who will have more control than ever over what channels they get. • People are increasingly shunning TV subscriptions altogether, with over-the-top (OTT) options on the Internet providing more choice for video consumers. • Those who still want a TV subscription are increasingly turning to IPTV services from telephone incumbents as subscriber numbers on cable and satellite services see a steady drop. Telus Corp. is taking TV-service market share away from Shaw in British Columbia and Alberta. Unlike Shaw, Telus has a wireless service to throw into bundles to entice customers. Officials from Shaw did not respond to an interview request to discuss these issues. A more recent decision from Shaw was its move last year to buy U.S. data-centre services provider ViaWest for $1.2 billion. This asset and Shaw's business services in general have been cited as reason for optimism in investment circles, as has Shaw's plans to adopt the next-generation TV interface X1 (provided by Comcast Corp. in the U.S.) for its television subscribers in the near future. "If can deliver on the growth opportunities in ViaWest and Business Services and also show improvement in consumer subscriber trends (driven by the Comcast X1 partnership), we believe there is room for upward estimate revision and valuation multiple expansion in 2016," Scotia Capital analyst Jeff Fan said in a research note last week, following an event Shaw held for investment analysts that focused on its enterprise services. Barclays Capital analyst Phillip Huang, discussing the same presentation, said Monday in a research note: "While ViaWest offers a significant growth engine, we expect new TV regulations (skinny basic in March, a la carte channels by end of 2016) will pressure core cable (44% of total revenue) and media business (20% of total revenue) in . We estimate a mid to high single-digit percentage of cable subs will want to go a la carte. The media segment however will see a bigger impact and will likely require further cost cutting to offset top-line pressures." Asked about Shaw's purchase of Canwest's broadcasting entities earlier this decade, Dave Heger, a U.S.-based analyst with Edward Jones who tracks the Canadian telecom sector, said in a phone interview: "The environment has probably changed from what they hoped for at the time they bought that, and I think any company that has media properties is trying to figure out how to make sure they still are monetizing that." He said it might not have been an outright mistake for Shaw to have acquired these properties, but "maybe they should've paid less" than $2 billion. Heger said despite the uncertainty facing Shaw's media division as its faces a possible culling of channels from people's TV packages next year, having these channels does provide some insulation for Shaw in terms of owning some of the content used to fill up its broadcast-distribution offerings. "Content costs are the single largest operating expense for cable companies, and so as costs have risen fairly quickly, by having control of at least some of the content, you've at least kind of helped set your own destiny on that front," he said. "At least you're not beholden to all the other media companies for all your content." Heger added that the Canwest deal provided Shaw with some content it can use for Shomi, the streaming service it operates jointly with Rogers Communications Inc. He added that, for the time being, Shaw's cable-TV service and its stations continue to bring in a lot of money, and that's not suddenly going to disappear, even with the coming changes in CRTC regulations. Shaw's most recent financial disclosure showed its media division brought more than $1 billion during the fiscal year ended in August. "I don't think the pay-TV model goes away overnight," Heger said. "It's a large market and there's a number of people who will just kind of continue with inertia and buy what they've been buying, but you do have to be looking at how to monetize in a online world." Research commissioned by the Cable & Telecommunications Association for Marketing's Canadian branch (CTAM Canada) indicated that most Canadian TV subscribers do not plan on scaling back their packages when new regulations take effect next year. 3Macs telecom analyst Troy Crandall said it's hard to say with certainty whether the Canwest transaction was a mistake for Shaw, though he said there's no question that serious challenges are being posed by current trends in the TV sector. "At the time, they obviously thought it was a good decision," he said in a phone interview. "But with the ongoing switch to over-the-top services, just the ease of access to alternative media, it has ended up over the past five years that certain types of content have done better than others." When it comes to Shaw's stable of TV channels, Crandall said one glaring problem is the lack of sports content, which is generally seen as one of the most lucrative types of content on linear TV because people still want to watch it live. "The types of content has really determined how successful you've been or you will be going forward, and the type of arrangements you have," he said, noting whether companies can secure exclusivity across multiple platforms would also be key. Crandall said changing regulations mean that specialty channels that survive largely on the fact that they are sold as part of bundles, and are not necessarily wanted by consumers, will face problems. He noted that, like all over-the-air television, the global network is struggling due to its reliance on advertising for revenue. The most recent communications monitoring report from the CRTC showed advertising revenue among private-sector, over-the-air broadcasters in Canada fell for the third consecutive year in 2014 to $1.64 billion after being as much as $1.95 billion in 2011. Crandall said the notion that content ownership is a key to success for providers of telecommunications services — a idea that was at its peak in the late 1990s and early 2000s — has yet to be proven. "It's still a tough business, and it's a slightly different business to what the telecoms do," he said. "They're distribution. Owning content's a little bit of a different ballgame. It puts them into new types of things. I think a lot of people would tell you the verdict is still out on that." Crandall said Shaw's forgoing of building a mobile service in favour of WiFi hotspots four years ago was clearly a mistake. He said other cable companies like Quebecor Inc.'s Videotron and Eastlink that bought spectrum in the 2008 AWS auction used it to start mobile services in their established markets and have been successful. "One can see that every feels the need and has put a lot of money into it," Crandall said in phone interview. "They didn't just say they thought they needed it; they put hundreds of millions of dollars down, saying, 'Yeah, we have to have this.' And that's what Videotron and Eastlink have done." Using Videotron and Eastlink as examples, Crandall said Shaw would have likely, by now, been at the point of of being profitable in its mobile business, or close to it. He added, however, that Shaw's debt levels might have been a factor in discouraging it from taking on the major expenditures necessary to build a mobile network. RBC Capital Markets analyst Drew McReynolds said in an email that building out a mobile network would have cost Shaw more than $1 billion "with the path to profitability at the time far from clear." Yet, Crandall said having a mobile service would have allowed Shaw to offer customers quadruple bundles that include wireless, home phone, television and Internet, giving it more leverage to compete with Telus. " gives companies like Telus a competitive advantage, too, because they can spread their marketing dollars across four products rather than just three," he said. He added that, unlike a startup such as Wind Mobile, Shaw would have gone into the wireless business with an established brand, giving it instant credibility. "On Day 1, you could start Shaw Mobile, and people would walk into a store and say, 'Oh yeah, Shaw Mobile; I'll consider them for my mobile devices.' They wouldn't just walk by the kiosk not knowing what the heck Shaw Mobile would be." Crandall also questioned how much value Shaw is getting from its WiFi network in terms of attracting and retaining Internet customers. "There's lots of hotspots out there," Crandall said. "There's a Starbucks, a McDonald's, Tim Hortons pretty much on every corner, at least in the metro areas, but that's kind of where Shaw offers their WiFi." Crandall said Shaw might have overestimated how much demand there would be from consumers to offload their data usage to a WiFi source. "I think people know how to manage their data now," Crandall said. "I think fewer people at the end of the month are running short on their data." Heger, however, said Shaw's decision to forgo starting up a mobile network might have been for the best. "On one hand you'd say, 'Why did you go spend the money in the first place to buy this spectrum, but they were able to at least get a decent price on the spectrum from Rogers," Heger said in a phone interview. In June, the federal government approved a deal that saw Shaw selling its spectrum in the West and northern Ontario to Rogers for $350 million — a healthy premium on the $190 million it paid for the spectrum in the 2008 auction. Heger said: "I do support their decision to not move forward because at that stage of the game you had three very well established players in Bell and Telus and Rogers, and it would difficult to earn a sufficient return on investment with having to build out network and trying to build up a wireless customer base." He noted that new wireless providers to emerge from the 2008 spectrum auction, such as Mobilicity and Public Mobile, did not survive, with Wind the only startup from that class to still exist as its own entity. While Heger agreed that Videotron has created a successful wireless service in Quebec, he said it likely benefits from a loyalty factor from many French-speaking Quebecers. It's unclear if this kind of allegiance could have been duplicated for Shaw in Western Canada, he added. Heger said Telus' ability to offer quadruple bundles has little to do with it stealing TV market share away from Shaw. He said the appeal of Telus' IPTV service, Optik, is mostly based on the better experiences viewers get from it and the top-notch customer service Telus backs it up with. Heger added that Shaw's build-out of a WiFi network seems to have helped it grow its Internet subscription base. Douglas Reid, an associate professor of business strategy at Queens's University, said in an email that Shaw generally does not "have a forward-facing position in terms of lines of business, given trends. In an industry with high uncertainty, this can be fatal. The problem is that to insist on taking a forward-looking position is to run counter to the share-price-maximizing logic of modern management — the Q2Q approach, or quarter to quarter." He added that "there was too much emphasis on current performance and a lot less than desirable against where the industry would be in a few years’ time. Whether a stock price is favoured or not becomes immaterial quickly when one’s asset position begins to resemble Kodak’s rather than Apple’s." — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Shruti Shekar at sshekar@thewirereport.ca

How do Shaw’s decisions on Canwest, mobile look today?

Broadcast | December 7, 2015

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