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BCE not ready to hang up on home phone business

BCE president and CEO George Cope speaks during the annual general shareholders meeting at the Congress Center in Quebec City May 3, 2012.


A revitalized BCE Inc. is optimistic about the future for the unlikeliest of products: the lowly home telephone.

A decade ago, the Montreal-based company was the top player when it came to the home phone, but its dominance was destroyed as cellphones became more affordable and cable companies began offering Internet-based systems.

Much of the focus has been put on the company's aggressive acquisition strategy, which has seen it transform from a sleepy utility to a media giant powered by fibre optic cables and a cellular network capable of broadcasting the Olympics in real time. But chief executive officer George Cope believes it can also win back many of the land line customers it once thought were lost forever.

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"I've never felt more positive about our consumer land line business than I do right now," Mr. Cope said during the company's second-quarter conference call Wednesday, after it reported a 31-per-cent jump in profit and boosted its dividend 10 cents to $2.27.

The company, which is in the midst of a controversial $3.4-billion takeover bid of Astral Media Inc., earned $773-million in the quarter, or $1 a share, compared to $590-million or 76 cents a share a year ago.

Some might wonder why Mr. Cope has such hope for the company's land line business, considering it lost 82,000 home phone accounts in the last quarter. But that's actually 17 per cent better than the losses a year ago, and the company thinks it marks the beginning of a turnaround in the division's fortunes. It is in the midst of a network upgrade that is getting fibre optic cable directly to consumers' homes in Southern Ontario and Quebec. It has spent hundreds of millions of dollars on the upgrades, which allows it to offer enhanced digital television services and faster Internet speeds to about 2.4 million households so far.

The company expected customers to line up for the service, which it calls Fibe TV. But there has been another unintended consequence – 90 per cent of the 158,000 consumers who switched to Fibe since it began rolling out in 2010 also subscribed to Bell's home phone and Internet services.

The network has only been built out in Toronto, Montreal and Quebec City, which means the gains could accelerate as it expands the service to include another million households by the end of the year.

Any pickup is a bonus: The company no longer relies on the division for its profits, since it has earned more from its television business than from home phones since 2010. And while it may not return the company to its phone-in-every-home glory days, it's one more predictable revenue stream that is still providing the company with comfortable 39.9 per cent profit margins.

There are, however, some who are skeptical of a land line resurgence. Bank of America Merrill Lynch analyst Glen Campbell said he expected the company to hang onto more of its subscribers, because its competitors weren't aggressively pursuing land line customers in the quarter.

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On the whole, though, analysts are painting a rosy picture of BCE's future, even as it approaches a regulatory hearing in about a month into its planned purchase of Astral, which is being fought by Quebecor Inc., Cogeco and Halifax-based Eastlink.

"Our thesis on BCE remains unchanged and we continue to like the prospects for the company, given trends in wireless and improving operational results in wire line," Desjardins Securities analyst Maher Yaghi said.

Mr. Cope fired back at the trio of companies who are fighting the deal on Wednesday, particularly Quebecor Inc., saying that after the Astral deal closes BCE will still be a smaller player in Quebec than its competitor and will be within regulatory guidelines in English Canada as well.

"It's ironic one of our competitors who has the largest market share in Quebec is somehow concerned now that they are going to have competition," he said.

"The threshold for market share is 35 per cent, and we will be at 24 per cent in French language Quebec and that's less than the company that yesterday was claiming we would be too large in Quebec."

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