Building an empire on a weak foundation

For the second time in a decade, the biggest telephone company in Canada has decided its future lies in owning the biggest television company.

Convergence, the buzzword of the late 1990s and early 2000s, and which was given the death sentence as the dot.com boom turned into the dot.com bust, is back in style.

Back in 2000, Jean Monty, then the CEO of telephone holding company BCE, paid $2.3 billion for an ownership with the Thomson family in CTV and the Globe and Mail to form a telephone-to-media conglomerate called BellGlobeMedia.

Monty survived for just two more years before his acquisition strategy turned sour and he resigned. It wasn't so much the media purchases that did Monty in as his ill-fated $1.7-billion purchase of the satellite firm Teleglobe.

Still, what then happened was a chastened Bell turned back to its roots and tried to take itself private in a complex deal with pension and investment funds. The boring old telephone company was returning to what it did best.

Now, George Cope, the CEO who took over the reins when the private buyout crashed in flames, is making almost the same play again, but this time for $1.3 billion. The acquisition prices aren't directly comparable, but the message is clear -- the value of television and media has gone down.

Was Monty ahead of his time or is Cope now throwing good money after bad? Whichever way you look at it, in big-business circles "convergence" is no longer a dirty word.

Bell is rapidly moving into television delivery to compete with the cable companies like Shaw and Rogers. It's BCE's stated business plan to be the biggest delivery company for television in Canada by 2015. That will be over Shaw's and Rogers' dead bodies.

Bell is playing catch-up. Rogers acquired Citytv a couple of years ago and has a stable of magazines, while Shaw recently acquired the assets of the former Winnipeg-based Canwest. The Shaw deal, like the BCE deal, is dependent on regulatory approval and, while it is likely to be given, it isn't a certainty.

The real question is whether these moves offer Canada a bright, converged future with a flurry of entrepreneurial spirit driving the fast-growing digital economy, or whether they reflect a more cautious, even defensive stance.

It's probably a bit of both. As video-on-demand, time-shifting and downloading of television have altered viewing patterns, broadcasters and cable companies have started to look more and more alike. The obvious move for a cable or telephone company delivering content is to purchase those who supply it. It protects their revenue streams and puts them in a good position to compete with upstarts like iTunes, the American Hulu, Google and Netflix.

It also probably protects them against foreign takeover. The Harper government has been considering lifting, at least to some degree, the foreign ownership restrictions on telecommunications companies. It is unlikely, however, to allow for foreign takeover of the broadcast sector, which has long been a touchstone of Canadian cultural policy. Once the telecommunications companies own the broadcaster, the chance of foreign takeovers recedes.

This will please those who fear the effect of foreign takeovers on Canada's economy, but it also means one of the potentially fastest-growing of today's industries will be playing behind a protectionist wall.

There is much that can and will be done by BCE to innovate in the brave, new second wave of convergence. More and more content will be streamed to mobile devices, whether smartphones, iPads or the tablet computers soon to be launched by Apple's competition. Television top boxes will become smarter and integrate with the Internet in ways we probably can't yet imagine.

The danger is our telecommunications companies will be more inward- than outward-looking and strive to be top dogs in Canada while the world leaves them behind.

In content today, whether it's video games, television shows, movies or online streaming, the smart money is on more growth outside of North America than inside it. In the converged world of telecommunications and content, the winners are going to be those companies that develop hardware, software and shows that take the world by storm.

So far, BCE's strategy appears to be all about convergence at home. If it is going to be a real winner, it needs to position itself for the inevitable future when the telecommunications and content borders come down and the world is a content free-for-all. I hope that is what BCE plans. Canada is too small a place to build a telecommunications empire. BCE can use its protection from foreign takeovers to build an international powerhouse for tomorrow. But will it?

Nicholas Hirst is CEO of Winnipeg-based television and film producer Original Pictures Inc.

Republished from the Winnipeg Free Press print edition September 16, 2010 A13