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Report on Business ‘Managing the decline:’ Canada’s cable companies fight to stem losses as Big Tech encroaches

Jacqueline Brandstetter and Cade Lake explore the Rogers Ignite truck on the CNE grounds in Toronto, on Aug. 19, 2018.

Christopher Katsarov/The Globe and Mail

As Big Tech giants push further into Canadian homes, offering video-streaming services and voice-activated devices to play them on demand, the country’s biggest cable companies are fighting to stem the tide of television cord cutters.

Rogers Communications Inc. and Shaw Communications Inc. have spent millions on new TV platforms with high-tech, user-friendly features, but it’s harder than ever to stand out as companies such as Amazon and Google make further advances with video-streaming services and smart speakers, Apple adds its iTunes content library to Samsung smart TVs and Netflix expands its massive programming budget.

Read more: ‘They are harming Canadian consumers.’ CRTC confirms Canadian telecom industry engages in misleading sales practices

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Cable TV subscribers, which used to make up the biggest part of the companies’ businesses, are steadily declining. From the end of 2013 to the end of 2018, Rogers and Shaw both saw their base of cable subscribers drop by about 20 per cent, to 1.69 million for Rogers and 1.63 million for Shaw.

Experts say the companies’ new offerings won’t reverse that trend. Instead, they represent an effort to minimize losses, remain in customers’ homes and sell internet, a much higher-margin and still growing business.

Calgary-based Shaw launched BlueSky TV two years ago and Toronto-based Rogers began rolling out Ignite TV in Ontario in the summer, both licensing U.S. telecom conglomerate Comcast Corp.’s X1 technology (after years of delays, Rogers launched an all-IP, or internet protocol, version that Shaw plans to move to later this year). The service comes with a voice-controlled remote and features an all-in-one hub of content that makes it easy to find TV shows and movies whether they’re on traditional stations, on-demand or streaming platforms such as Netflix.

Yet, the sleek new services – aimed in part at battling back competition from IPTV (internet protocol television) options launched earlier in the decade by their telephone-company rivals BCE Inc. and Telus Corp. – face increasingly tough competition from over-the-top (OTT) streaming video subscriptions. And as smart TVs that come preloaded with streaming apps get cheaper, and smart speakers get better at connecting entire homes (think: “OK Google, play the Fyre Festival documentary on Netflix”), traditional cable offerings, even with vastly improved interfaces, are a tough sell.

The trend of cord-cutting – cancelling traditional television services or “shaving” down to less-expensive packages – has so far not been as pronounced in Canada as it has in the United States, where an abundance of OTT services compete aggressively for customers. But that could soon change as Netflix continues to win international subscribers at a fast pace (price increases notwithstanding), and now that Amazon Prime has been available north of the border for two years, CBS All Access launched here last year and you can find most children and teens watching YouTube. The Canadian owners of valuable sports and content rights – long considered the biggest draw for traditional TV subscriptions – have also made them available as standalone products.

“Whether the device is a modem, set-top box/TV, smart TV, speaker, digital assistant or even PC, smartphone or tablet, the battle that is underway for service providers like the cablecos and telcos is to ‘own the smart home’ and be the primary content aggregator/platform that ties it all together,” RBC Securities analyst Drew McReynolds said in an e-mail.

“X1 (and IPTV for that matter) is an excellent video platform and will certainly carve out an early share of this market. Longer-term, however, the telecom industry will increasingly bump up hard against big tech.”

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Mr. McReynolds said his long-standing view is that the Comcast X1 platform will not be an “IPTV killer” in Canada, but rather that it "should stabilize if not improve the television net loss trajectories for the cable companies.”

In part that’s because Shaw and Rogers have now made it clear they’re not willing to offer deep discounts just to win television subscribers. The starting price for one of the recommended Ignite TV bundles (with unlimited internet service) on the Rogers website is $135 a month, while Shaw recommends a BlueSky TV and internet package for $110 a month, but the price increases to $155 after six months.

Shaw pulled back on its initial approach of low-price promos and is now focusing on the profitability of its video service, which comes with significant costs to acquire TV content, including channels that TV distributors are required to carry. “It’s not for all customers,” chief executive Brad Shaw told reporters following the company’s recent annual general meeting.

Mr. McReynolds said Rogers has taken a “slow and steady approach” to deploying its new TV product, “downplaying the importance of recapturing television market share and rightfully focusing instead on the longer-term benefits of retaining higher-value households, lowering cable [capital investment] intensity and leveraging the platform to provide a broader suite of smart home services.”

The Comcast product “roadmap” is expected to allow Rogers and Shaw to offer smart-home services, such as controlling lighting and heat and using the voice control to turn the household WiFi off at dinner time, for example.

“Broadband is the foundation of the home and our Ignite platform will build on that foundation” Rogers CEO Joe Natale said in an e-mailed statement.

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Indeed, for both companies, the goal is partly to use a better TV product to win a larger share of the high-speed internet market, where margins are much higher without hefty content costs. For example, TD Securities analyst Vince Valentini estimates Shaw earns 50 per cent of the EBITDA for its overall cable division from internet and just 26 per cent from television, which includes its cable and satellite TV businesses (EBITDA means earnings before interest, taxes, depreciation and amortization).

Kaan Yigit, president of Solutions Research Group, said the Comcast platform is appealing, “But it’s coming at a time when consumers are really starting to look carefully at their bills and [say], if I’m not using cable enough then I’ll cut it.”

According to the most recent CRTC figures, 74.8 per cent of Canadian households subscribed to traditional television services as of the end of 2016, down from 82.8 per cent in 2012.

So for cable companies, it’s all about “managing the decline,” Mr. Yigit said. “Looking at the spreadsheet and seeing a gentle downward curve quarter to quarter, not a sharp drop.”

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