Wednesday, February 1, 2006

Bell Canada 2005 Review - No Mention of the V-Word

Today, BCE - Bell Canada's corporate holding company - held their 2005 Business Review here in Toronto. It's a widely followed and well attended event - lots financial analysts in blue suits, along with a handful of industry analysts and media types. While most of the people were there to hear about the numbers, people like me were looking for where Bell is going and how they're going to get there.

I only stayed for the first set of presentations, which were given by Bell's top 3 execs - Michael Sabia, George Cope, and Robert Odendaal. That was enough for me, and during this time, plenty of key messages and strategic directions were provided. However, to the best of my recollection, not once did I hear the V-word mentioned - VoIP. I found that pretty amazing, and I'm sure most people who read my blog would concur. There's absolutely no doubt that VoIP is having a major impact on Bell, both in their consumer and enteprise lines of business. As big carriers go, Bell is actually very tech savvy, and in my view, ahead of all the RBOCs. But they just can't bring themselves to say VoIP. VoIP. VoIP. VoIP. Say it - VoIP. It's not that hard. V - O - I - P.

For those of you who don't know, Bell is actually a really great company, and they are very much the 800 pound gorilla in Canada. They pretty much hold a monopoly in telecom, have very deep pockets, and are active in virtually all segments of the communications market.

Michael Sabia certainly talked about how Bell is embracing IP, and how it is driving growth. He said that nextgen revenues accounted for 47% of the total in 2005, compared to 53% for legacy. By 2008, the target mix is 65% nextgen/35% legacy. Similarly, nextgen only accounts for 25% of EBITDA today, but this is expected to rise to 50% in 2008. So, Bell fully expects that revenue growth will come from IP, and with its higher margins, nextgen will also drive earnings. Sounds like a plan.

That said, he acknowledged that cable telephony is eroding their landline franchise, but never said it was VoIP. To stem the tide, he said Bell will focus on the brand and customer service. So, it's a marketing and customer support plan - a defensive strategy to protect their customers. No mention about Bell's own VoIP offering - which could be used either defensively to retain customers, or offensively to enter new markets. That's VoIP, but they just don't seem ready to talk about that. Is it just me?

There were many interesting performance metrics cited throughout the presentations, and I'll just quickly reference a few that caught my eye.

- 2005 operating income for residential service was $2 billion. Local access may be in its early stages of terminal decline, but there's still money to be made there. Perhaps more telling is the comparison to 2004 - operating income was down 5.6%. I'll bet the decline will be even higher for 2006.

- Buried a bit deeper in the handout was the number I was looking for - landline losses. In 2005, Bell lost 324,000 landlines, which is 2.5%. This is quite a bit lower than the 4+% level hitting the RBOCs, largely because wireless substitution is less of a factor in Canada. Nonetheless, 2004 landline losses were only 1.1%, so the incidence has more than doubled in a year's time. Mr. Sabia noted he expects that number will continue to rise due to competition, so we can rest assured Bell isn't being caught off guard! Just don't call it VoIP.

- Not surprisingly, long distance revenues are dying. 2005 LD revenues were $2.0 billion, down from $2.3 billion in 2004. This is a drop of 12.2%, by far the biggest percentage decline among all of Bell's revenue buckets. Now, here's the twist. LD minutes were actually up 1.3% in 2005 to 18.3 billion minutes. Interesting, huh? One factor would be their $5 flat rate LD offer which ran in the first half of the year, but was later dropped. It was just too good, and downright uneconomical. Oh well. They're still earning about 10 cents a minute on LD, and given how cheap LD is these days from just about everybody else, their margins must still be pretty good.

- As we all know, the real growth is elsewhere - video, wireless and Internet. Video subscribers were up 15% in 2005, reaching 1.7 million. Not bad for satellite TV. Wireless subs were up 11% to 5.4 million. That's a lot of cell phones for a country of 33+ million. High speed Internet subs were up 21% to 2.2 million.

I'll stop here with the numbers, and wanted to add a few more takeaways.

- Bell announced they are spinning off much of their rural business into an Income Trust. This has been in the works for a while, and will take 1.6 million lines off their books. The rationale is that these lines are in a more stable, slow growth, and less competitive market, which I guess is the ideal scenario for an Income Trust. The RBOCs are certainly thinking along these lines, and the basic message is they want to get out of markets where the upside for IP services is limited. Just a business decision - plain and simple.

- Guess what folks? Now that I've spun a tale of strong growth and profits, here's the bad news. Price increases are coming! They managed to slip that in oh, so subtlely. So, all those high growth, high profit services will now become even higher profit services - Internet access, wireless and video. I guess as long as the market isn't yet saturated, and subscribers continue to love the bundle, we'll pay for the privilege of getting it all from Bell. Chances are we'll barely notice if the hikes are buried in the fine in that all-too-convenient single bill we get in the mail.

- IPTV is coming - no surprise there. During the breaks, they had some live demos of new services and gadgets - it was pretty good. I thought the IPTV demo looked good, and the date for commercial rollout was supposed to be announced today. I haven't seen that yet, though.

To wrap up, I quite liked what I saw, and Bell seems patently aware of the challenges it faces with growing competition, along with managing growth across so many lines of business. I missed the Q&A sessions, but Mark Evans of the Financial Post was there, and he added some cogent commentary about what he saw on his blog post from earlier today.

Here are photos from the event, again, courtesy of my Nokia N90...


First up, Michael Sabia. I'm afraid the N90 does not capture detail very well when shooting from a distance.


Latest gizmos and gadgets


All flavors of video - IPTV (top), HDTV (left), regular (right)


IPTV - PIP - picture within a picture - neat!


Mark Evans, National Post


Ian Angus - not his everyday attire, but he wears it well. We both live in a parallel world - the Toronto Blues Society - you can find him in this batch of photos from last month.

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