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David and Goliath

Pierre Karl Péladeau sits beneath a bronze bust of his father as the skyline of Old Montreal gleams outside the towering windows of his enormous corner office.

It's a regal setting that befits the king of Quebec's French-language media. As chief executive officer of Quebecor , founded by his late father Pierre, Mr. Péladeau reigns over an empire that includes the continent's largest French-language broadcaster, as well as Vidéotron Ltée, the dominating force in Quebec's cable television and broadband Internet markets and a major player in its home phone sector.

Mr. Péladeau now has his eye on an even bigger slice of his province's telecom revenues. In September, he will ignite a battle for Quebec's cellphone market, as Vidéotron becomes the first major Canadian cable company to launch its own wireless network since Rogers Communications Inc. did so 25 years ago.

For Mr. Péladeau, the battle is another chance to take on the much larger Bell Canada, the dominant phone company in Quebec. For the rest of Canada, it's a preview of the coming regional wars that will play out between phone and cable companies - a conflict that will drive down prices for telecom services across the country and redraw the national telecom landscape.

Driving the clash is the growing ability of both cable and phone companies to offer all four essential products that home users want - television, high-speed Internet, home phone and cellphone service. As the differences between various providers shrinks, the fight for customers is set to grow more vicious.

Nowhere will the battle be more fierce than in Quebec, where Vidéotron - which operates only in the province - and Bell Canada, a Montreal-based company that derives roughly a third of its wireless revenue from Quebec, will be going head to head. Neither can afford to lose.

Adding drama to the conflict is the cultural tension between the two. Executives at Quebecor and Vidéotron stress time and time again that they are a Quebec company - the implication being that archrival Bell is an outsider that just happens to have set up shop in Montreal 130 years ago.

In his office, 19 floors above the bustling Rue St-Jacques in Montreal, Mr. Péladeau's confidence is obvious as he deflects a question to his key lieutenant, Robert Dépatie, who heads his firm's Vidéotron division. The two executives were the ones who in 2005 unleashed a campaign to steal home phone customers away from Bell. In just three years, Vidéotron attracted 600,000 subscribers to its new service.

Now the query isthis: Are they looking forward to Bell's response when they try to make similar inroads by launching a wireless network?

Mr. Péladeau, eyeing his colleague with a mischievous grin, leans back and issues a stern directive. "Say it. We are."

Mr. Dépatie echoes his boss: "We are."

The fight for Quebec is officially on.

Angling for the 'quad play'

Both cable companies and phone companies are now struggling to "own the home" - in other words, they want to shut out rivals and become the sole supplier of all the paid telecom services flowing into a consumer's house.

The reason is simple: When a household takes all of its services from one provider, it becomes a more lucrative and more stable customer, one less likely to switch to another company.

To win market share, both cable and phone companies have made a practice of bundling their offerings and giving big discounts to customers who agree to take more than a single product. The goal of offering the full "quad play" of television, home phone, wireless and Internet service is more difficult than it sounds.

While Rogers has been able to offer the quad play in key markets in Ontario, other telecom companies have always had a weak link in their bundled packages. Phone companies, for instance, provided only limited television options - such as satellite TV, which tends to flicker in bad weather - while regional cable companies like Vidéotron didn't have their own wireless service, and so could only resell service from national carriers like Rogers.

Finally, those long-standing limitations are beginning to disappear. Traditional phone companies, such as Bell and Telus Corp., are beginning the long process of rolling out Internet-protocol TV (IPTV) products to offset declines in their fixed phone-line businesses and to complete their own bundles with something better than satellite television.

IPTV, which is delivered over broadband Internet and fibre-optic cables, offers superb picture quality and the ability to stop and restart a program from any TV in a house. Given IPTV's advantages over cable, "people will switch," says Dvai Ghose of Canaccord Genuity.

The downside to IPTV is that it requires phone companies to build expensive wired Internet networks that extend right into the home. To date, IPTV is only available in parts of Toronto, Montreal, Edmonton, Calgary and Vancouver. Rolling the product out across the country will take years and billions of dollars.

For their part, Vidéotron and other cable companies, such as EastLink Communications Inc. in Halifax and Shaw Communications Inc. in Calgary, have a faster, less expensive challenge ahead of them. They are building their own wireless networks in their home regions, a process that costs hundreds of millions of dollars, but that will allow them to offer their own cellphone service, rather than merely reselling other firms' wireless plans at relatively low profit margins. Their plan is to bundle cellphone service with existing Internet, cable and home phone products, and price it at a steep discount to the offerings from rivals.

In Quebec, that provider is likely going to be Bell, Quebec's biggest wireless player, with 39 per cent of the market. If Quebecor can be as successful in winning wireless customers from Bell as it was in its earlier foray into home phone service, it will put a serious dent in Bell's Quebec revenue.

It could also drag wireless prices well below current levels. When Vidéotron launched home phone within a bundle of other products, it priced the service as much as 60 per cent below Bell's prices at the time, says Brahm Eiley of Convergence Consulting Group Ltd. Thanks to its aggressive discounting, Vidéotron has won 32 per cent of Quebec's home phone market, up from nothing just five years ago.

There is no reason, Mr. Eiley adds, to expect anything different this time around. "Given the environment that we're in right now, and the pricing, it would be unbelievable if Vidéotron didn't come out with the same type of radical price undercutting," Mr. Eiley said.

Bell, though, isn't the indebted weakling it was when Vidéotron staged its foray into the home phone market. Under president and CEO George Cope, BCE has rejuvenated the brand and revitalized the wireless side of the business with an upgraded network.

"Bell is going to react," says Maher Yaghi, a Montreal-based analyst with Desjardins Securities, who says he recently switched his home service from Vidéotron to Bell when the phone company offered him a deal. "[It has]to offer a lower price, which could degenerate, over time, into a price war."

Bell Mobility president Wade Oosterman says the coming competition in Quebec is heading towards a "battle of the bundle," as both Bell and Vidéotron vie to offer a complete range of services to households. He maintains that Bell's national breadth, scale and buying power gives the company a big advantage over Vidéotron, which he dismisses as a regional player.

"If they're going to get aggressive, well, we know how to be aggressive. If it becomes a quad-play market, who really gets hurt? Not us. Because we can compete in a quad-play," Mr. Oosterman says. "You're more susceptible to a price war if your product isn't good, and your cost structure isn't good."

Bell says it won't instigate a price war - but that may depend on how the term is defined. Mr. Dépatie of Vidéotron points out that Bell is already offering its IPTV personal video recorder, or PVR, free of charge for up to three years, while Vidéotron sells a similar device for about $500.

And in mid-August, Bell slashed handset prices in Quebec by $100 and offered a 20-per-cent discount on a rate plan if a customer signs up with Bell for three years.

"We're not here to create a price war," Mr. Dépatie says. "The war has already started."

A new telecom landscape

It's a war Mr. Péladeau will go to great lengths to win. Colleagues universally describe him as intense. "Everything is very personal for him … it's a family business," says Anthony Lacavera, chairman of wireless provider Wind Mobile. "He's at war with the incumbents."

In conversation, Mr. Péladeau makes joking allusions to his reputation for cost-cutting and chides Mr. Dépatie for not being "hard enough" to handle the radical restructuring of the early days after Quebecor acquired Vidéotron in 2000. A few seconds later, he's joking that if Mr. Dépatie enjoys his job as much as he says, he should give up his salary.

But Mr. Péladeau's tough-love approach gets results. Phil Lind, a vice-chairman at Rogers, gives him credit for revitalizing Vidéotron. "For years, Vidéotron was slower than the rest. But now they're right up there with the rest, and lead in other categories."

Regional cable players EastLink in Halifax and Shaw in Calgary have already said they will launch their own wireless networks within the next year, but Vidéotron will be the first out of the gate.

By the time each cable company has launched a wireless network and the major telcos have expanded their networks to make IPTV more available to cable subscribers, Canada's telecom landscape will be drastically different.

Profit margins are likely to come under pressure. The industry will also become more fragmented along regional lines, because companies that don't have the ability to offer all four services in an area won't be able to compete with the bundled offerings of firms that do.

One of the firms likely to feel the effects of increasing regional fragmentation is Rogers, which has the second highest share of Quebec's wireless market at the moment, but can't bundle its product because it doesn't have a cable TV presence in the province. It could see its wireless share devastated as the two main players in Quebec, Vidéotron and Bell, hunker down for a grinding period of competition that will result in Rogers' wireless-only offer becoming less compelling.

In its battle against Bell, Quebecor's vast French-language media and broadcast holdings may give Vidéotron an advantage, allowing it to deliver French-language content to smart phones in Quebec. "Convergence was successful in Quebec," Mr. Péladeau says. "We have the best assets."

At Bell, Mr. Oosterman, unsurprisingly, sees it differently. "Vidéotron is now like Rogers," he says. "And the last time I checked, we do pretty good against Rogers."

The battle to see who's right will reshape Quebec's telecom market. And it will be just the first of many similar battles across Canada.

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