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by Richard Blackwell
The Globe and Mail
Oct 09, 2004
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In Mr. Rogers' neighbourhood, there is
"us" and there is "them." Mr. Rogers, of course,
would be the 71-year-old founder of Rogers Communications Inc., the
cable television, cellphone and media conglomerate. That's "Us."
"Them" are the traditional telephone companies, primarily
Bell Canada and Telus Corp. — fierce and unrelenting rivals to
Rogers in the market battle for cellphones, television signals and Internet
services.
And the war is heating up. The phone companies are soon expected to
invade more of Rogers' turf by adding wire-based TV distribution to
their satellite services. In turn, Rogers hopes to crack the telcos'
local phone market through Internet telephony.
Mr. Rogers often likes to portray his firm as the underdog David in
a market dominated by the telco Goliaths. But David moved to add another
powerful weapon to his arsenal last month, with the proposed $1.4-billion
takeover of Montreal mobile phone firm Microcell Communications Inc.
by Rogers Wireless Communications Inc.
In fact, during a conference call, Mr. Rogers defined the deal in terms
of the new entity's relationship with the telephone companies. "The
proposed combination of Rogers Wireless and Microcell," he said,
"will create a stronger single entity with the scale to continue
our rich history of providing a challenge to those telco providers in
all 10 provinces." In classic Ted Rogers hyperbole, he declared
it "a great day for Rogers and Microcell shareholders, management
and employees, a great day for the Canadian wireless industry, and most
importantly a great day for wireless customers in Canada."
And, vowing to keep Microcell's Fido brand and its technology platform,
which is similar to its own, he insisted that his firm would be a builder
at Microcell, "instead of someone coming in and tearing everything
down, closing it up and firing the people." collection to an online
storage service? Clearly, in Ted Rogers' view, anything that challenges
the power of the entrenched phone companies is good not just for Rogers,
but the country.
From Rogers' side of the ledger, there's no question that the deal looks
positive. In acquiring Microcell, it eliminates a competitor, boosts
the number of Rogers Wireless customers to more than five million, and
cements Rogers' role as the dominant player in what is certain to be
one of the next decade's key technologies. But it also comes with enormous
risk. In effect, Rogers Communications is mortgaging the farm to buy
into its founder's vision, betting that long-term wireless revenue will
offset the short-term debt. And it's doing so at a time when large questions
are beginning to loom over Rogers' succession.
"He's the only person wanting to take on the challenge of Bell
and Telus, [with] not even anywhere close to the capitalization of those
two companies," says Kaan Yigit, president of Solutions Research
Group, a Toronto technology market research firm. "You have to
admire him for that. [But it will be] tough to keep the whole thing
working with spit and tape, on the back of one entrepreneur's vision."
That "spit and tape" involves a complex web of borrowing that
keeps Rogers Wireless, its sister companies Rogers Cable and Rogers
Media, and parent Rogers Communications afloat. Ratcheting up the Rogers
group's debt to pay for Microcell, Rogers Wireless will use $100-million
of cash, draw down $700-million from its bank lines of credit, and get
a $600-million bridge loan from parent Rogers Communications.
"It's going to leave very little room for error in the way the
company executes over the next little while," observes Rory Buchalter,
an analyst at Dominion Bond Rating Service in Toronto. DBRS has put
all the companies in the Rogers group "under review with negative
implications." Still, Mr. Buchalter says, the deal is "doable,"
because the wireless operations have the prospect of generating solid
cash flow.
It is precisely that prospect of expansion within the exploding wireless
business that has many observers praising the Microcell takeover. "It's
a brilliant move on [Ted Rogers'] part," says Dean MacDonald, a
former Rogers Cable executive who is now chief executive officer of
Persona Communications Inc., a Newfoundland-based cable television firm.
"He's going to lever up [debt] a little bit, obviously, but that
company is going to kick off some cash flow."
Mr. Yigit agrees that Rogers' commitment to boost its wireless business
is a crucial strategic move, despite the financial balancing act required.
Rogers is now a powerful player "where the fire hoses meet,"
he said — in the key areas of entertainment, technology and communications.
Of those, cellphones and ancillary wireless applications are the fastest
growing. Mr. Yigit says the technology is now at the point where the
Internet was eight years ago: poised to make a huge impact on the way
almost everyone lives and works.
Of course, in 1988, Mr. Rogers made a similar kind of commitment and
gamble: on the long-distance telephone business. In competition with
the telcos, Rogers invested hundreds of millions, buying a 29.5-per-cent
stake in long-distance provider Unitel Communications Inc. It was an
unmitigated disaster. In 1995, Rogers finally walked away, after racking
up losses of about $500-million.
But wireless, Mr. Yigit insists, is another story. Long distance was
a discounted, lowmargin commodity game, he notes. "Wireless looks
to be significantly better — a different animal." With enhancements
such as video and data being added to cellular service, "ultimately
you'll be able to generate more revenue and profit per subscriber."
The pattern in other countries that have greater rates of wireless penetration
may provide some guidance for how the Canadian market will evolve. While
the proportion of Canadians who have cellphones is expected to hit 50
per cent next year, it's already close to 100 per cent in places like
Sweden and the Czech Republic. (Not everyone in those countries owns
a phone, but people with more than one device push up the numbers.)
But the competition for Canadian cellphone users will be intense —
even with the removal of Microcell from the marketplace. The three heavyweights,
Rogers Wireless, Telus and Bell Mobility, will soon be joined by a new
player, Richard Branson's Virgin Group PLC. In partnership with Bell,
Virgin Mobile Canada LLC is poised to introduce a low-end cellular service.
Virgin, Mr. Yigit predicts, is "going to come out swinging."
Nor is wireless communications the only theatre of war. Rogers Cable,
like other cable companies, is planning to launch local telephone service
next year, using new technology that allows calls to be carried over
its cable Internet wires. Rogers has said it will spend about $200-million
to create the new business, with payback projected over about three
years. The Canadian Radio-television and Telecommunications Commission
held hearings recently to determine how to regulate the new services.
Rogers' decision to pursue the local telephone business is wise strategically,
says Brahm Eiley, president of Convergence Consulting Group Ltd. in
Toronto. It "wouldn't be unreasonable" to expect as many as
50 per cent of Rogers' cable television customers to be buying telephone
services from the firm by the end of the decade, Mr. Eiley predicts.
He calls it a "no-brainer," especially if prices are competitive.
Adds Mr. Eiley: "We think all the cable companies are going to
do very well offering wireline telephone service."
Other cable revenue streams will also emerge, because new technology
allows for the addition of profitable "bells and whistles,"
such as video-on-demand, highdefinition television, and personal video
recorders. But while Rogers may be able to exploit these new technologies,
it will have to keep one eye peeled for Bell and Telus; both plan to
beef up their satellite television distribution with new wireline delivery
of TV signals.
The third leg of Rogers Communications is its media division, a mixed
bag of specialty television and radio stations, and magazines such as
Maclean's and Chatelaine (picked up in the 1994 purchase of Maclean
Hunter Ltd.). While these assets don't mesh closely with the cable or
wireless businesses, they do provide a national media presence and platforms
for low-cost cross-selling.
One consultant who has worked closely with Mr. Rogers says the media
division is likely to stay, mainly because "Ted hates to sell stuff."
Moreover, "radio is where he started and he has a real affection
for it."
Its debt load notwithstanding, the issue that hangs most heavily over
the Rogers empire is what happens when Ted Rogers, its guiding visionary,
is no longer there to lead it. Although there is no sign he plans to
retire any time soon — his employment contract runs to the end
of 2006 — the succession question has often been raised by company
observers.
Two of Mr. Rogers' children work for the company: Son Edward is CEO
of Rogers Cable, while daughter Melinda is vice-president of strategic
planning and venture investments at the parent company. Edward is perceived
as competent in running the cable arm, says an executive familiar with
the company, but "the vast consensus is that if he wasn't Ted's
son, he wouldn't be there." Others, however, are more positive.
Mr. MacDonald, the former Rogers Cable executive, described Edward as
"extremely bright," hard working, and very knowledgeable about
all facets of the business.
George Fierheller, a long-time director of Rogers Wireless who helped
pioneer the cellphone business in Canada, says it will be up to the
Rogers Communications board to determine who will run the company after
Ted. "That's what the kids understand," Mr. Fierheller says.
"Ted has been quite clear that the board of RCI will have to make
that decision at the time." The board will "look at the Rogers
family members and see what role is appropriate," Mr. Fierheller
said, and it could very well recruit an outsider if it sees fit.
But the Rogers legacy will likely remain. Whoever succeeds him, it will
still be Us against Them.
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