Telecoms will adjust to pick-and-pay regime, analysts say

Financial analysts reacting to the CRTC’s new pick-and-pay rules say they don’t expect the decision to have a major impact on the industry, though the broadcasting side of the business is more vulnerable than TV distribution. Troy Crandall, a telecom analyst with 3Macs, said in a phone interview Friday that pure broadcast distributors, such as Telus Corp. and Cogeco Cable Inc., will be least affected, while companies focusing on content, such as Corus Entertainment Inc., will see the biggest impact. The CRTC announced Thursday that TV providers must offer a skinny basic TV package, priced at no more than $25 a month, by March next year. Also by that time, TV providers must offer either pick-and-pay, or a choice of either self-built packages or small pre-assembled packages, for channels outside of the entry-level basic. By December 2016, they must offer customers both of those options. Crandall noted that companies have been offering pick-and-pay in Quebec for some time, and management at BCE Inc., Quebecor Inc. or Cogeco have never said “there’s pressure on subscriber revenue due to the fact that Quebec has pick-and-pay … So I think it’s fairly comparable.” Distributors might also be able to pick up new customers who previously found TV prices to be too high, but are now willing to pay $25 a month, including younger viewers who have never had TV service. “It might be cheap enough now that they say, 'Yeah, I will take that $25 package,' ” Crandall said. On the other hand, some existing TV customers might choose to switch to smaller packages or get rid of some channels, he noted. However, if those customers go to online streaming alternatives, their Internet usage will go up, which would benefit telecom providers through overage charges or customers upgrading to higher tiers. “So what they give up, maybe, on the TV channel side, they may be able to pick up in revenue, on the Internet side,” he said. Manon Brouillette, CEO of Quebecor's Videotron unit, said in a press release Friday that the company supports "the CRTC's desire to give consumers still greater flexibility and more freedom of choice. ... The customer has always been Videotron's top priority. Videotron became the first cable provider to offer a 'build your own package' option more than 10 years ago. We are enthusiastic about continuing along that path." Other TV service providers, including Rogers Communications Inc., Shaw Communications Inc., Cogeco and Telus expressed support for the CRTC's decision on Thursday. Bell declined comment and continued its silence into Friday. Crandall also noted that because the CRTC decided not to cap prices for individual channels, “they might be able to make up some slack on the more premium channels, such as sports.” He added that there are also channels that were created as filler, to satisfy CRTC rules stating that providers must provide a preponderance of Canadian channels, and some will disappear, since there won’t be a need for them anymore. The CRTC changed those rules Thursday, saying that under the new framework, providers must "offer" a preponderance of Canadian channels as opposed making sure customers "receive" them. In an interview Thursday, CRTC Chairman Jean-Pierre Blais said that both the market and framework released by the CRTC will help ensure that prices of the new, smaller packages are reasonable in the absence of direct regulation, though he added that the CRTC would be “keeping an eye on this, and if need be, I’m sure we’ll jump back in.” In response to a question about whether the CRTC’s attitude is the same for the prices of individual channels, Blais said “how much you want to pay for an individual channel is very much an individual reality. There are third-language services, for example, sold for between $4 and $15 a month. …. It’s a value proposition.” Crandall said vertically integrated companies that are involved in both content and distribution, such as Bell, Shaw and Rogers, will see similar impacts as pure distributors, though they have “content that they have to worry about too.” “That really comes down to the type of content they’re offering, the geography of the content,” as well as how much of the business relies on content and the language it’s offering. That means Quebecor is likely the least affected, because “there are limited alternatives on the Internet for people to go to for French content, and one of the alternatives Club Illico, which is owned by Quebecor.” He said children’s programming might be especially vulnerable, since it won’t be included in the new skinny basic. Analyst Posner Haran, who covers media at RBC Dominion Securities, said in a research note that Corus has “significant exposure” after the decision, since TV broadcasting accounts for about 68 per cent of its revenue. Content also accounts for about 70 per cent of revenue for DHX Media Inc., he added. “However, mitigating factors include the opportunity to produce and distribute content globally to a growing pool of OTT buyers,” he added. Drew McReynolds, also an analyst with RBC Dominion Securities, said in a research note that the impact of pick-and-pay on profitability for service providers "should be manageable." He said Shaw and Cogeco are most vulnerable, since TV distribution makes up 23 per cent of their enterprise value, followed by Quebecor at 21 per cent, and it's less than 10 per cent for Bell, Rogers, Telus and Manitoba Telecom Services Inc. Out of Canadian telecom companies who are also broadcasters, Shaw is most exposed since TV broadcasting is 13 per cent of its enterprise value, he said, compared to six per cent for Bell, three per cent for Rogers and one per cent for Quebecor. McReynolds also cautioned that the full impact of the CRTC’s new rules will not be clear for a few years until they are implemented. “Not only is there a lack of a relevant global precedent around television channel unbundling to provide guidance, there will be a complex interplay between a number of important yet somewhat unpredictable variables, including consumer behaviour, the price elasticity of individual channel demand and fluid promotional activity — all taking place against the backdrop of rising structural headwinds, such as cord-cutting and cord-shaving,” he wrote. Iain Grant, a telecom analyst with the SeaBoard Group, said in an email that while the decision should “change the economics for some specialty packages” it won’t mean any significant changes from the consumers’ perspective, since bundles will still be offered by providers and customers who want a PVR or cable box will either have to buy one, or subscribe to “a higher value package than 'basic.' ” “And with Apple TVs and similar devices getting increasingly capable, the idea that shifting the cable package around will stem the tide of cord cutting/shaving is unrealistic,” Grant added. Tim Casey, managing director at BMO Capital Markets, said in a research note that there were “no material negative surprises in the decision.” He said it has"little impact" on companies such as Telus, Quebecor, MTS, Cogeco and Rogers. "Given their relatively larger non-sports specialty portfolios, it will have slightly more meaning (or complications) for BCE, but based on relative scale, it is not meaningful to near-term cash flow forecasts,” he wrote. “It is worth reiterating that video services are the lower margin product in a video-data-voice bundle and that as spending shifts into data from video (or the lines of what is a video and data subscriber blur), BDUs will offset some of the impact of video revenue loss with overall margin gains,” he added. Desjardins Securities telecom analyst Maher Yaghi said in a research note that the new rules should be “manageable” for big broadcast distributors, though he forecast a decline of between $5 to $10 in average revenue a month from TV customers. However, he added that "we believe BDUs will make up the difference by steadily raising high-speed Internet prices." Scotia Capital analyst Jeff Fan said in a research note that even with the $25 cap on skinny basic packages, “given the low content cost of the required channels (i.e., local Canadian OTA), we believe BDUs can preserve margins.” He added that sports content is not included in the skinny-basic packages, which could affect penetration and advertising revenue of sports channels, with Bell’s TSN and Rogers’ Sportsnet potentially the most affected. Fan said that the new pick-and-pay options outlined by the CRTC “give consumers more choice, but not necessarily at a lower price. Since there is no price regulation and BDUs can continue to sell their current packages, we believe BDUs will have the flexibility to maintain their existing economics,” he noted. — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Telecoms will adjust to pick-and-pay regime, analysts say

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