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TORONTO (GlobeinvestorGOLD)—Earlier this year, CanWest Global Communications Corp. took the bold step of putting former music executive Rick Camilleri in charge of its convergence effort. The move caught a lot of industry insiders off guard, considering CanWest owns 16 TV stations, seven specialty channels, and 11 daily newspapers, and Mr. Camilleri has no TV or newspaper experience. His task is to create content for the CanWest empire's vast array of media outlets—and turn a profit.
If convergence was in a three-year coma, we may have just seen its baby toe wiggle. But don't tell that to CanWest shareholders. Investors in media stocks are in no mood for flighty talk of a day when Internet, television, and telephone content come streaming into Canadian households on one broad and flexible fiber-optic or wireless link. Convergence, along with dot-com, have become dirty words since the tech meltdown of spring 2000.
In the 1990s, convergence had a broad and opportunistic meaning. Basically, one link would bring users live-event broadcasts traditionally associated with television, video-on-demand associated with the Internet, and the real-time interactivity associated with the telephone. As it turned out, convergence took on a more commercial meaning, opening the door for companies in all three industries to market their services together and make money through the dual revenue streams of advertising and user fees. Merger-and-acquisition mania followed, and the industry developed an insatiable appetite for capital to meet its unrealistic growth expectations.
Since the meltdown, grandiose convergence plans from global media giants such as AOL Time Warner Inc. and Vivendi Universal have unraveled. In late March, a Toronto investment conference heard nine of Canada's largest broadcasters and publishers—including CanWest and Bell Globemedia, which owns this Web site—present growth plans based on building market share, lowering costs, and maintaining revenue streams. There was no mention of the C word.
In fact, earlier in the year, BCE Inc.—owner of Bell Globemedia and Sympatico—backed away from convergence with the sale of its stake in Internet portal Toronto.com and the return of various Web sites to their parent companies such as The Globe and Mail and CTV. There has also been talk from time to time that Bell Globemedia itself could be sold. In December, BCE had bought back a 16-per-cent stake in phone utility Bell Canada from an affiliate of SBC Communications Inc. of San Antonio, Texas, giving it 100 per cent of Bell and putting it solidly in the phone business. In other words, shareholders demanded media and telecom companies be run like real businesses, and the companies toed the line.
From an investment prospective, the rapid evolution of the Canadian media/telecom industry makes evaluating the stocks difficult. No single sub-index on the TSX includes all the players or potential players in the convergence game, so comparison is often apples-to-oranges. For example, while Rogers Communications Inc. and Shaw Communications Inc. provide both Internet and cable services, they also broadcast through local and specialty channels. Rogers provides wireless phone service through subsidiary Cantel. CHUM Ltd. is a broadcaster, Torstar Corp. is a newspaper publisher, and neither one owns any large communication pipelines. Telus provides telephone and Internet service but does not produce content the way CHUM and Torstar do. And so on, and so on.
Analyst coverage is just as vague. The overall consensus rating on media/telecom stocks is "buy," with the odd "hold" thrown in. The global economic downturn, combined with the post-9/11 tightening of advertising budgets, combined with the uncertainty caused by the war in Iraq, is producing a murky short-term view. On April 4, Glen Campbell of Merrill Lynch downgraded BCE from "buy" to "neutral," saying multiples of 14 to 16 times earnings were too rich in a deteriorating regulatory climate.
The media/telecom sector, however, has never really been big on traditional valuation methods such as price-to-earnings. At the height of the tech bubble three years ago, some companies were trading at hundreds of times earnings. At the time, analysts with "strong buy" ratings said the sector could not be valued with the old P/E model because of its huge growth potential. Fourteen to 15 times earnings would have been a bargain back then. Now, newspaper publisher Hollinger Inc., for example, is trading at just over seven times trailing earnings, Quebecor Inc. is trading at nine times, and TVA Group Inc. is trading at 10 times.
So you have to ask: does convergence have the potential for huge earnings? David Ellis, a media analyst with Omnia Communications Inc., says yes. "Convergence may have died on Bay Street, but it's alive and well in the living rooms of the nation," he says. Here's why: three-quarters of Canadians are on-line, and 50 per cent of on-line households have broadband service. "Broadband is the way of the future," he says, and he faults content-providers for losing direction. "The content must find its audience, and the audience is everywhere".
Mr. Ellis says if convergence is to succeed, however, it must first go through divergence. Mega-convergence attempts like AOL Time Warner's failed because they were too large and centralized. Mr. Ellis sees a spin-off trend toward lighter, more nimble "multi-platform partnerships" that combine revenue streams from TV, laptops, PCs, game consoles, cell phones, and wireless handheld units.
He also says investors won't get serious about convergence until broadcasters understand that advertising alone will never bring an acceptable return on investment. He says broadcasters such as CanWest "need to resist the idea that advertising is everything." Twelve years ago, the amount of revenue from sources such as user fees paid by cable companies exceeded ad revenue in the TV industry for the first time in history—and the gap has grown wider every year. "Eventually, the Internet will follow the same model" he says.
To Mr. Ellis, CanWest and BCE are fumbling toward convergence and have become leaders by default. He says BCE is on the right track by holding on to Sympatico and adopting a strong revenue model through user-pay music and games.
Still, he cautions that convergence has a long way to go. One big red flag, for example, is waving over the issue of copyright protection and the ability to download content for free. It seems that's the nature of convergence, though: unidentifiable forces keep moving it forward, and it builds the bridges when it gets to the rivers.
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.