Cable Firms Make a Bold Gamble | The Canadian Encyclopedia

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Cable Firms Make a Bold Gamble

Shaw Communications' $2-billion purchase of CANWEST GLOBAL COMMUNICATIONS' television empire is all about piping TV content over "multiple platforms" - cable, satellite, broadband INTERNET and wireless smartphones.

This article was originally published in Maclean's Magazine on May 24, 2010

Cable Firms Make a Bold Gamble

Shaw Communications' $2-billion purchase of CANWEST GLOBAL COMMUNICATIONS' television empire is all about piping TV content over "multiple platforms" - cable, satellite, broadband INTERNET and wireless smartphones. But Peter Bissonnette, the president of the Calgary-based cable company, doesn't want you to call it CONVERGENCE. After all, that was the concept that underpinned the last round of media consolidation at the beginning of the decade, when TV, newspaper and Internet companies largely failed to turn grand ideas about common ownership and content-sharing into big profits. The granddaddy of such deals was the US$350-billion mega-merger of AOL and Time Warner, which is now regarded as one of the biggest disasters in American business history. This time around is different, assures Bissonnette. "AOL is so Cro-Magnon compared to what is happening today."

There's no question the media landscape of 2010 bears little resemblance to that of 2000, when pokey dial-up Internet connections were common and computers, cellphones and television sets boasted very different functions. These days, the lines are blurred as people are equally likely to watch video on their laptops, type emails on their cellphones and access interactive Web features on their giant, flat-panel HD television sets. And then there's a whole new category of device, Apple's iPad. Call it what you like, but for cable operators, a new era of convergence has dawned.

Already in the business of connecting people through cable, broadband and (soon, in the case of Shaw) wireless, cable companies have spotted a once-in-a-lifetime opportunity to become the new big shots of the media world by purchasing troubled broadcasters and their programming. The hope in this latest round of mergers is that, by owning popular TV programs, movie titles and specialty channels, cable companies will have more control over their own futures and will avoid becoming mere purveyors of so-called "dump pipes" - a catch-all phrase for content delivery mechanisms ranging from traditional cable to broadband Internet connections. So far, the biggest such deal is U.S. cable giant Comcast's US$13.75-billion bid to take control of NBC Universal. If approved by regulators, the deal would radically alter the American media landscape.

But analysts and observers aren't sold on the trend, arguing that the media sector has a poor track record when it comes to big mergers and acquisitions. There's also scant evidence to suggest owning content makes cable companies any better off. In fact, Shaw sold off its television assets through Corus Entertainment in 1999 in a move that analysts applauded. But just because the logic behind convergence deals has historically been a bit fuzzy, that doesn't mean another major industry upheaval isn't about to take place, and the impact on consumers could be huge.

Shaw ended up owning the country's second-biggest television network, built and controlled until recently by Winnipeg's Asper family, through a shrewd bit of deal-making. In February, Shaw purchased a $95-million minority stake in the Global TV network and a few specialty channels owned by Canwest, which has been operating under bankruptcy protection since last year. But what still eluded Shaw were the specialty TV channels, including Showcase, Food Network and HGTV, that Canwest controlled through a complicated agreement with the private equity arm of U.S. investment bank Goldman Sachs, which bankrolled Canwest's purchase of Alliance Atlantis in 2007. Headed for a nasty court battle with Goldman, Shaw surprised observers by hammering out a deal, with the help of a mediator, to buy out the private equity firm's stake.

But while Shaw demonstrated considerable prowess by grabbing a major asset under the noses of its competitors, the strategic rationale for opening up the company war chest to buy a struggling TV broadcaster is less clear. For one thing, Shaw already distributes the Global programming, which is available free over the air, to its customers.

Shaw's official explanation is that owning Canwest outright will give it greater access to ownership and licensing rights for U.S. network programming, allowing Shaw to more easily offer hit shows such as 24, Heroes and Glee through video-on-demand (VOD) services. Bissonnette says VOD currently represents a $100-million-and-growing business for Shaw. In the future, he says Shaw will no longer need to negotiate side deals with Canwest for the necessary rights. "If you're putting a lot of money on the table to get first [broadcast] rights, there's a better argument to get broadband and streaming rights than you would if you're coming separately, cap in hand," says Bissonnette. "It puts you in a more advantageous situation."

CEO Jim Shaw was more blunt during last week's conference call with analysts. "If we're in for just a little bit and we have to negotiate with Goldman and everybody else, we get no control over content," he said. "Now, Shaw is the largest cable provider in Canada, largest video provider in Canada, close to the probably largest Internet [provider] in Canada, and Brad [Jim's brother and Shaw's executive vice-president] and the boys are working on wireless, like, heavy. We see no reason why we shouldn't jump in here."

Shaw also claims that controlling the rights to such programs will enable it to "differentiate" its proposed wireless offerings from those of its competitors. As a result, consumers can expect to see cable companies like Shaw try to use content - access to clips from hit TV shows or big sporting events - as a carrot to make their wireless and broadband services more attractive. It's a strategy similar to the one they've been using for years to get customers to sign up for higher-tier cable packages.

Shaw isn't the only cable operator diving into the content game head-first. The Comcast deal south of the border means the cable provider, which already serves a quarter of U.S. households that pay for television, will now also own NBC's broadcast network, Spanish-language TV station Telemundo and about two dozen lucrative cable channels, including USA, Bravo and Syfy. It will also own Universal Pictures. The move is seen as an effort by Comcast to diversify its holdings and set itself apart from rival cable operators and new providers of similar services, such as phone companies offering satellite or IPTV (television delivered through Internet connections). Comcast and Time Warner are - like Shaw - hoping to blunt the appeal of free TV-streaming Websites like Hulu (co-launched by NBC Universal) or illegal downloads by pursuing a strategy called "TV Everywhere" that would see hit shows available over the Internet and eventually on cellphones.

But observers remain skeptical. "It seems to be perennially appealing for the conduit guys and the content guys to get together, but I don't know why," says Gerald Faulhaber, professor emeritus in the business and public policy department at the University of Pennsylvania's Wharton School. "Maybe it's because the conduit guys are in a sort of boring business and they want to be on the red carpet with the starlets, who knows?" He's only partly kidding. "We've seen this happen time and time again, but you never really see something happen. People talk about synergies, but you never really see it."

Indeed, there are relatively few examples of successful unions between the companies that make or own content and those that deliver it to people's eyeballs. The reason, says Faulhaber, is there's generally no need for, say, a cable company to own the TV shows when it can simply buy the rights to distribute them. He points to media company Time Warner's decision last year to spin off its cable operations after realizing they were separate businesses. "What synergies are you going to get? The cable company is going to promote only Time Warner content? Of course not. They want to get as much content as they can from a lot of different people."

In Canada, those who have tried to pursue similar strategies have not fared much better. This week Canwest saw the rest of its once sprawling media empire unravel after a group of bondholders successfully bid $1.1 billion for its stable of Canadian newspapers, including the National Post. Dvai Ghose, an analyst at Genuity Capital Markets, wrote in a recent research note that phone giant BCE's purchase of broadcaster CTV 10 years ago also was unsuccessful and that cable giant Rogers Communications has yet to prove that its media assets, including Citytv and its vast stable of radio stations, have had a meaningful impact on either its core cable or wireless businesses (Rogers also owns Maclean's magazine). Ghose says consumers don't really care who owns the content they seek, as long as they can watch it. "In our view, consumers look to their connectivity provider [TV, Internet or wireless] for the best possible connectivity experience at the lowest possible price."

Of course, just because the synergies between the two businesses aren't immediately apparent doesn't mean that Shaw made a bad decision. "Broadcasting is having some problems, but it's still a good business," says Brahm Eiley, the president of Convergence Consulting Group. "And given the regulatory framework and [the possibility] there are going to be some changes, it absolutely makes sense to play in this space."

Indeed, Shaw is now in a much better position to help influence the overall direction of the media sector in this country, particularly when it comes to negotiating with the CANADIAN RADIO-TELEVISION TELECOMMUNICATIONS COMMISSION over things like Canadian content and fee-for-carriage, which refers to demands by broadcasters that cable companies compensate them for carrying their signals. "That's what Rogers and Shaw have been screaming about for years," says Eiley. "Now they're finally getting closer to be able to shape things. They're sitting on both sides of the fence."

For Shaw, Comcast and others, it may be that the notion of convergence - marrying the medium with the message - is simply too alluring to ignore. In theory, controlling the consumer's entire media experience, from the shows they watch to the services that deliver them, should make for a bulletproof business model. Now somebody just needs to prove it is one.

See also BROADCASTING.

Maclean's May 24, 2010