Shaw profit falls amid new CRTC rule for cord-cutting

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Shaw Communications Inc. reported a drop in profit in the second quarter as it shed more subscribers than expected in part because of a new rule from Canada's telecom regulator that makes it easier for customers to walk away from contracts.

The Calgary-based cable company said Tuesday a Canadian Radio-television and Telecommunications Commission (CRTC) decision in December that banned policies requiring customers to give 30 days' notice before cancelling television, Internet or land-line service resulted in the one-time loss of about 35,000 extra subscribers in the quarter.

Over all, Shaw lost about 36,000 cable TV customers, 12,000 land-line telephone subscribers and 1,800 Internet customers in the quarter, figures that were all worse than analysts had predicted.

On top of the one-time subscriber loss caused by the CRTC rule change, Shaw has been losing home-phone customers at a quicker pace. Chief operating officer Jay Mehr said Shaw is shifting its strategy because it previously encouraged new customers to buy land-line services as part of a "triple-play" bundle that also included Internet and television, but once a six-month promotional discount expired, "they overwhelmingly disconnected."

"We're interested in selling home phone to people who want home phone," Mr. Mehr said on a conference call Tuesday. "For us to try to force a university student who's moving away from home for the first time to take a triple-play bundle in his or her dorm room, we don't think is in the long-term interest of our business. We think we should sell that customer more Internet."

He said Shaw will see higher losses of land-line subscribers over the next one to two quarters but said he expects the impact on revenue to be limited as many customers who signed up for home phone as part of a promotion are already paying very little for it.

The company said price increases it introduced at the beginning of the year are helping boost revenue, but those gains were offset in the quarter by losses stemming from the CRTC decision, as well as higher promotional costs and fewer television subscribers.

Sales at its consumer division, the company's largest business unit, declined 0.5 per cent to $937-million while overall revenue was up 4.9 per cent to $1.34-billion.

Shaw said its profit for three months ended Feb. 28 was $168-million, down 24 per cent from a year earlier as a result of restructuring costs as well as a one-time gain recorded on the sale of two specialty channels in the second quarter of 2014.

The company announced in February it was consolidating its customer service centres into fewer cities and said it incurred about $38-million in severance costs due to the changes, which affected 1,600 employees.

Net income was 34 cents a share, below analysts' projections of 39 cents.

Amid the worse-than-expected subscriber numbers, some suggested that Shaw's results revealed a migration from telephone and cable subscriptions to wireless services and online video options. Shaw does not have a cellular business so can only hope to take advantage of that movement on the Internet side.

The losses in the quarter "reflect a growing industry concern that cable and satellite services are quickly losing pricing power and may now be reflecting cord-cutting," said Macquarie Capital Markets Canada's Greg MacDonald. He added that his view is that Shaw is implementing the "right strategy" by increasing prices on high-speed Internet to address those losses.

Shaw continues to face pressure from its Western rival Telus Corp., which operates a wireless business and has poached cable and satellite customers with its IPTV offering.

"Over all, the results indicate that Shaw has still not found a sustainable way to stem the negative impact of wireless substitution, TV cord-cutting and competitive intensity from Telus on its residential operations," said Desjardins Securities analyst Maher Yaghi.

And although Shaw lost an unusual number of customers as a result of the CRTC rule change, it's possible that its competitors gained, noted Canaccord Genuity's Dvai Ghose.

"While some departing Shaw TV customers are no doubt cutting the cord, we assume that the vast majority … are going to [telephone company] IPTV solutions," he said, pointing to Telus Corp. and Manitoba Telecom Services Inc. as potential beneficiaries.

Mr. Ghose added that national wireless carriers Telus, Rogers Communications Inc. and BCE Inc. could have picked up departing home phone customers.

Shaw also operates a media business that includes the Global television network as well as numerous specialty channels. Revenue in that division was flat at $238-million in the quarter.

Barb Williams, president of Shaw Media, said the company cut about 90 jobs in its media division last week as part of a "tightening down on our traditional broadcast business as that business sort of flattens out." She added that Shaw is adding about 40 new positions "with a new skill set around new kinds of content, new kinds of platforms and new kinds of advertising products."

Global News said last week that the restructuring came as the company makes "sweeping changes to how it produces news in Canada," and centralizes many production functions in Toronto. It said it was actually increasing overall front-line newsgathering staff.

The CRTC recently announced a wave of changes that will usher in a "pick-and-pay" regime and could have a negative impact on the broadcast industry.

Shaw chief executive officer Brad Shaw said he expects the company to deliver on its guidance for the remainder of the year and will find a way to address the new regulatory environment.

"It's not without challenges, don't get me wrong... of course we have to manage, of course we have to be able to adjust, but generally we think it's very manageable," he said on the conference call, noting that he supports the commission's emphasis on customer choice.

Shaw's business network division reported revenues increased 8.4 per cent to $129-million. A separate unit that includes the U.S. data centre and cloud services provider ViaWest, which Shaw acquired in September, had revenue of $60-million in the quarter.

The company's shares closed down almost 3 per cent or 82 cents at $28.10 on Tuesday.