Shaw's bid to win back the West
The company's strategy is focused on the long game, but is it doing enough now?
It was $100-million Brad Shaw didn't want to take.
The chief executive officer of Shaw Communications Inc. was in Halifax in June, 2015, when he got the call from Guy Laurence, then the CEO of Rogers Communications Inc.
"He said, 'Oh, great thing, we've got this all figured out, we're going to buy the spectrum from you,'" Mr. Shaw says, punctuating his story with a characteristic boisterous laugh during a rare interview at the company's Calgary headquarters.
It should have been good news. A deal he had sealed more than two years earlier to sell wireless airwaves to the Toronto-based telecom giant was finally complete and Rogers was ready to pay the balance after a deposit of $250-million. But the Shaw CEO wasn't happy.
"We were a little disappointed."
The problem was a change of heart. In the years since Mr. Shaw struck the Rogers deal, he and his management team had shifted their view on the wireless business. And it wasn't the first time. The company had made stabs at a mobile strategy before – at least three times over the span of two decades – but had always remained on the sidelines as Rogers, BCE Inc. and Telus Corp. built cross-country networks and attracted millions of subscribers. By 2015, after years of wavering, Shaw wanted in. Now, it had no spectrum.
The spectrum sale netted a profit of $158-million but that was cold comfort. It represented yet another chapter in a string of strategic missteps – and not just on the wireless front. An ill-timed investment in media in 2010 saw the company pour $2-billion into a set of broadcasting assets just as advertising revenues began to plummet.
Meanwhile, Shaw's core cable-television business, the heart of a family company with more than 40 years of history, was bleeding customers as Western rival Telus Corp. moved into the TV market and more people cut the cord in favour of online streaming services. Revenue growth at Shaw's cable division, which used to post healthy double-digit increases on an annual basis, had flat lined.
It was time for change – or, as Mr. Shaw likes to call it, "the pivot."
The company launched a broad shakeup in 2014 that saw it reorganize into separate consumer- and business-focused divisions plus a dedicated technology and network team. The same year, it used extra room on its balance sheet to buy ViaWest, a U.S. data-management business that has shown promising results and helped Shaw set up a similar operations in Canada.
But its big bet came in December, 2015, when it sealed a deal for wireless upstart Wind Mobile. It paid $1.6-billion for Wind, which – beset by legal issues, uncertain ownership and all but starved of capital – had staggered along long enough to attract close to one million subscribers. Shaw funded its wireless investment a month later when it announced the sale of its media assets to Corus Entertainment Inc. (conveniently also controlled by the Shaw family) for $2.65-billion.
By last fall, as Shaw was preparing to relaunch Wind as Freedom Mobile, Mr. Shaw was convinced his company had reached a turning point. During an hour-long interview with The Globe and Mail, he swings from blunt assessments of past struggles to wide-eyed excitement for the path ahead.
"Oh, I'm pumped," he says, leaning forward on a sofa and accentuating points with his hands. "We're well thought out, we have a lot of choices. And we've never had this at any time in our company, and to have it now, with everything changing so much? It's powerful."
His management team's priorities are clear: win back some of the cable TV business; sell more Internet; and, critically, use new-found Freedom Mobile to round out a roster of connectivity services. In short, sell the bundle. Win back the West. "We want to make customers' lives simpler. We want them to be on our network 100 per cent of the time."
It's an ambitious goal. And enemy No. 1 is Vancouver-based Telus.
"It is about execution for us now – we pivoted, we got all the assets. Now, it's this team against Darren's team," Mr. Shaw says, referencing Telus's famously intense CEO Darren Entwistle. "So how well are we going to be able to do that?"
It won't be easy. "This renewed Shaw growth story will not be without its challenges, including execution, managing heavy wireless capex requirements and facing a very strong wireline competitor in Telus in Western Canada," RBC Dominion Securities Inc. analyst Drew McReynolds says.
Freedom Mobile is in the midst of a generational network upgrade, but even when that's done, only a limited number of devices will work on its new network. Until their network service improves, companies such as Apple and Samsung will not allow Freedom to sell their premium phone products. The carrier also needs more spectrum to help it improve service in office buildings and parking garages and likely won't be able secure any in the near future.
Shaw's strategy for Freedom is focused on the long game, but even as it takes distant aim at the market controlled by the Big Three, there are questions about whether it could be doing more sooner. It committed to spend $250-million on Freedom's LTE network roll-out between 2016 and the end of this fiscal year in August, which compared with it competitors, is "considerably lower than what we have seen in the past," Canaccord Genuity's Aravinda Galappatthige says.
Some say the company should double down on wireless right away, by selling non-core assets to devote more resources – and management attention – to the mobile strategy. But Shaw executives insist they're comfortable with their current plan for capital spending, which will see the company commit about 60 per cent of its $1.3-billion envelope for 2017 to a number of "growth initiatives," including wireless, its new TV platform, BlueSky TV, and upgrades to its cable network.
While Mr. Shaw looks forward to going on the offensive after playing defence against Telus for years, Mr. Entwistle isn't likely to stand down.
"Telus has a very strong management team," Scotia Capital Inc. analyst Jeff Fan says. "And I don't think they're going to sit back and let Shaw run the table."
'We got pounded'
In July of 2012, an electrical fire ripped through a transformer room at Shaw's Calgary headquarters, triggering the sprinkler system and knocking out the building's power. Radio stations went off the air, communications outages wreaked havoc on key services across the city – and almost 600 Shaw employees were later displaced due to water damage in the building.
A "complete renovation and restoration" was added to a major corporate overhaul – a program known internally as "Focus to Deliver" – that was about to get under way, prompted by the painful recognition that the company was floundering on several fronts and needed to beat a bold new path.
When executives and managers returned to the office in December, 2014, they found both an altered corporate structure and a vastly improved workplace. Shaw Court is an airy space, flooded with natural light and its walls are adorned with art, a Canadian-focused collection curated by company founder and current executive chairman, JR Shaw.
When asked about his artistic choices during a chance encounter at a quiet restaurant in Calgary, the Shaw patriarch lights up. The art's placement and symbolism are important, he explains. In the hallway outside his CEO son's office, for example, a painting of a campfire urges employees to have "fire in their bellies," he says, and a piece entitled Road to the Future tells them to focus on what's ahead.
When JR signed up his first cable customer just outside of Edmonton in 1971, he could not have foreseen the struggles his company would one day face as it seeks to make the transition from the cable-TV operator he built to an Internet and wireless-data company.
JR started small, but Shaw was listed on the Toronto Stock Exchange by 1983 and became Canada's fourth-biggest cable company by 1985. In the 1990s, Shaw borrowed heavily to invest in cable acquisitions along with network build-outs and upgrades to offer high-speed Internet. JR's eldest son, Jim, took over as CEO in 1998 and saw his father's debt binge pay off as Shaw had little trouble snapping up new digital television and Internet subscribers over the next decade. It even cracked into home-telephone service, using voice-over Internet protocol technology, eating into Telus's traditional market.
The company's market value grew, too: from $189-million in 1990 to $2.2-billion in 1998 and $9.5-billion in 2010, when Brad took over from his brother. But the landscape was about to shift dramatically.
Right away, Mr. Shaw faced a major test as the company's core cable-TV business was under attack.
Telus, once a rival only in telephone and Internet, was coming on strong with Optik TV: a new Internet protocol television (IPTV) offering that enticed customers with interactive features and advanced PVR functions. And customers were buying in. By 2015, Telus's TV business cracked the million-subscriber mark.
"You kind of thought, 'Oh, no, we'll be able to compete.' But we found out [Telus] came in with a good product at the right price point, and really took it to us," Mr. Shaw says.
Shaw failed to counter. Faced with competition from the likes of Optik TV and Internet streaming options that led some to cut the cord completely, the company has lost more than 600,000 cable subscribers since 2011.
"We were a little blind in how we were managing the business," Mr. Shaw says. "You always want to do a good job. You don't want to come in as CEO and get pounded. And we got pounded."
At the same time, the stable of broadcast-media assets – which Shaw acquired in 2010 for $2-billion out of the CanWest Global Communications Corp. restructuring – was deteriorating as advertising dollars disappeared.
By 2014, Mr. Shaw and his management team – a group he had either recruited or promoted since stepping into his brother's shoes – knew it was time for radical change.
"It's almost like you have to go back three years to 'Focus to Deliver,'" chief marketing and culture officer Jim Little says during a roundtable interview with a handful of top Shaw executives, referencing the changes launched in 2014. "That was the beginning of the pivot as far as we were conscious of it."
Shaw president Jay Mehr adds the company was struggling to respond to the TV threat posed by Telus. "There was an awareness that the game we were playing was not a winnable game. That the stuff that had made us successful for the previous 10 years was not going to make us successful for the next 10 years."
They combined all of Shaw's residential-service businesses – cable, satellite, Internet and home phone – into one consumer division, created a separate enterprise unit for any services sold to business clients and merged engineering and IT departments into one technology and network team.
Shaw shed 400 jobs in the process and cut even more when it consolidated its customer-service call centres into fewer cities, a move that affected 1,600 employees. In its 2014 and 2015 fiscal years, restructuring costs amounted to $110-million.
Still, there was the question of a strategy on wireless. In the 1990s, Shaw invested about $30-million for a 10-per-cent stake in Microcell Telecommunications Inc., which operated as Fido and was sold to Rogers in 2004. But Shaw dumped its investment in 1998. In the 2000s, Shaw management mused about offering cellphone service through a partnership with one of the Big Three, but the company never actually struck an agreement with one.
Then, with an eye toward building its own wireless network from scratch, it paid $189-million for spectrum licences during a 2008 public auction. The effort was on-again-off-again from the start. When Mr. Shaw took the reins in 2010, the build was stalled.
"And that was the first decision I had to make as CEO: Do we build or not?" Mr. Shaw says. "And I'm going, 'Am I giving up the family company here? Are we going to be lost?'"
"We bought the spectrum and always loved wireless, but when you looked at the economics and the cost at the time, wow. It was a billion-plus dollars," Mr. Shaw says, recalling the 2011 decision to scrap the wireless build and instead construct a constellation of WiFi hot spots across Western Canada, a move many dismissed as a shabby substitute for a cellular network.
Rogers secured the option to buy Shaw's spectrum in 2013. By the time the deal was finalized with that fateful phone call from Mr. Laurence two years later, Mr. Shaw had decided he needed a way into wireless. That's why he paid $1.6-billion for Wind Mobile, an upstart that had been purchased about a year earlier for just $300-million by a group of scrappy hedge funds. Did Shaw wait too long to pull the trigger? "We were sniffing around, but of course, we couldn't engage in any conversations … because Rogers didn't want us doing any of that. So we had agreed to that," he says, referring to an informal agreement to support Rogers' efforts to win regulatory approval of the spectrum transfer.
Plus, Mr. Shaw says, the higher price he eventually paid was worth it. In just over a year, Wind had acquired a swath of cheap airwaves in an auction and even more spectrum as part of the Mobilicity sale to Rogers. Wind's momentum was building and Shaw was ready to pounce.
"It all fully supports our plan to grow in the next few years," he says. While Shaw is a long way from contending directly with the Big Three wireless
incumbents, it has, for the first time, a way forward on mobile. Now, the company has to execute.
At Shaw Court, just as you enter Mr. Shaw's office, is a large painting of a wolf. The message, JR says, is simple: "Act like a wolf or get eaten by one."
The future isn't friendly
When Shaw unveiled Freedom Mobile in November, the image it presented publicly was somewhat softer: a teddy bear named Freddy. The puppet, designed and built by Jim Henson's Los Angeles-based Creature Shop, puts a cuddly spin on Shaw's cellular ambition.
Freedom has launched LTE – or fourth-generation – cell service in Toronto and Vancouver. It has also begun to offer wireless customers free use of its 65,000 WiFi hot spots in Alberta and British Columbia. Executives say one day, the company will have multiple wireless brands, but analysts say it isn't likely to launch service under the Shaw banner until its network and customer service are much better.
For now, as Shaw plots a course into territory controlled by a powerful pack in Rogers, Bell and Telus, it is a lone wolf. As in nature, it is wise to temper hunger with a stealthy approach.
"As everyone likes to put us in the corner, then you come out fighting a bit more," Brad Shaw says with a wide-eyed grin. But he's careful to offset his boasts about being unpredictable and "guerilla" with a dose of caution. "You know, we're not going to be crazy and nuts," he says. "I wouldn't say we're going to 'disrupt' the market, but really add a lot of value in it."
The last time they faced a threat, the Big Three fought back hard.
When the new wireless entrants launched after the 2008 government spectrum auction, Rogers, BCE and Telus used discount brands to undercut the startups' low prices, charged the new carriers prohibitively high prices for roaming services and made it difficult for challengers to access existing cell towers.
The national carriers won't cede ground now without a fight either, especially in a maturing market in which subscriber growth is harder to come by. The broad outlook for Canada's wireless market, BMO analyst Tim Casey says, "is one of a functioning oligopoly and low but stable growth."
And Freedom is at a disadvantage. Shaw still has far less spectrum than any of the incumbent carriers and no lower-frequency airwaves, which help provide deeper coverage into buildings. Quebecor Inc. is sitting on unused spectrum Shaw would like, but the Montreal company doesn't seem to be in a hurry to sell.
There are only a handful of devices compatible with the spectrum Shaw is using for its new LTE network and it will be at least a year or two before Shaw can buy airwaves in the next public auction – and even longer before it can put that spectrum to work.
In the meantime, some suggest Shaw should follow a winning model that has already been proven south of the border by T-Mobile U.S. Inc.: The "un-carrier."
To take on the U.S. market leaders AT&T and Verizon, T-Mobile deployed more than a dozen tactics starting with eliminating contracts and eventually killing data caps with unlimited plans. Since launching the strategy in 2013, T-Mobile has more than doubled its subscriber base to 69 million customers.
But Freedom Mobile CEO Alek Krstajic has said the Canadian market doesn't warrant as aggressive an approach. The company has seen "great growth already" on its original 3G network, he says, referring to the segment at the lower end of the market. "I think you will see that kind of thing continue in a much more stable approach to how we attack the market." He says the company is not chasing quick subscriber growth but is focused on profitability.
Still, Freedom's strength – and Wind's before it – is the ability to attract budget-conscious customers by offering good value. Its monthly average revenue per user (ARPU) is about $37, compared to the national carriers, which report ARPU figures that are now pushing $70. But Mr. Krstajic has suggested on earnings calls that prices will go up, "because we have to end up at an ARPU level that is in the 40s as quickly as we can."
Relative to the incumbents, Freedom has far fewer subscribers on its network, which places less demand per person on its spectrum. That means Shaw could keep prices 15 per cent to 20 per cent lower than the Big Three and still offer big data packages, Macquarie Capital Markets analyst Greg MacDonald says.
"It's not a price war," he says, "But it allows Shaw to grow their subscriber base nicely but not so high that they encourage a response from the incumbents."
Success in wireless is likely to be a slow and steady increase in market share rather than the explosive example set by T-Mobile, says Moody's analyst Bill Wolfe. "The question is: Does it slow the rate of Telus's expansion? And that's the real reason why [Shaw] went out and bought the thing."
For Mr. Shaw, the end goal is clear: Take on Telus and take back the living room. "Wireless is a leader – into the bundle, into the home," Mr. Shaw says. He expects that one day it will help him sell more Internet and television subscriptions and support a recovery in Shaw's core business in the West. That will be easier once Shaw can put its own name on the wireless product and sell it alongside its residential services.
That won't happen until "the network is good enough to compete head on with the Big Three," Barclays Capital's Phillip Huang says. "There's no doubt that's their long-term aspiration, it's just that they're not there yet and they're not likely to be there soon."
The question some are asking is whether Shaw should be doing more to get there faster.
While most agree this is a long game for Shaw, many analysts argue the company should sell assets to fund a more aggressive push right now – in both the wireless division and the company's recently launched premium television product, BlueSky TV.
The ViaWest data centre business, which the company bought for $1.2-billion (U.S.) in 2014 is one option for a sale. It could also begin selling the shares it owns in Corus; after the Shaw Media sale it acquired Corus stock worth about $1.85-billion, and hold restrictions begin to expire in April.
Mr. Shaw says he loves the ViaWest business while avoiding directly speculating about a sale, and on the Corus shares, he says, "we truly support where they're going… but we'll have to wait and see just where we land." He's adamant that Shaw is not in fire-sale mode, saying large institutional investors approached him with offers to lend the company hundreds of millions of dollars after the Wind deal was announced.
"When you look at our growth potential profile, there's a lot of people that want to be part of that … it gives you comfort that you have those options."
For now, Shaw is focused on the near term by upgrading its network and building LTE service, rebranding, working on customer service and investing in its WiFi strategy, says Barclay's Capital's Mr. Huang.
"But they can only go so fast. They need capital redeployment, spectrum and time."