Commentary: Bell's Wired Woes

Saddled with yesterday's tech, perhaps Bell can save itself only by embracing what it most fears.

Over the past few months, BCE Inc.'s Bell Canada unit has been running a parade of sorts. Convoys of service vans, often unmarked and usually old and battered, were rolling through Ontario neighbourhoods in a bid to make up for service-call backlogs caused by a prolonged technicians' strike. Adding to the road show's burden were 60,000 Bell customers who decided it was time to cut their phone lines.

Bell Canada wasn't the only telco with a rolling review this summer. Verizon Communications Inc. sent Hummers onto the streets of Keller, Texas. Their mission, however, was marketing rather than repair. Keller, a Dallas bedroom community, is the first of hundreds of locations in which Verizon has installed high-capacity fibre-optic cables directly to houses, in a bid to boost revenues and expand–or at least keep–its customer base by offering video on demand, cable TV, super-fast Internet connections and new flavours of telephone service.

The differences between the two companies go beyond the motorcades. Bell Canada's most recent quarterly earnings came in at 50¢ a share, well below expectations of 56¢. At Verizon, by contrast, everything is up. Revenues rose by 5.4%, earnings increased despite massive spending on the technology upgrade and marketing, and average customer spending is on the rise.

When George Cope, the former head of Telus Mobility, takes over as the grand overseer of BCE's telephone, Internet and video operations in January, he, perhaps thankfully, won't have to worry about Verizon. Unfortunately for Cope, however, Quebec and Ontario's major cable operators long ago did Verizon-ish network upgrades of their own, while Bell was busy buying the Globe and Mail newspaper and CTV network. Both sides in the cable-versus-telephone showdown placed early wagers on the Internet. But now that it's coming time to cash in the chips, it's increasingly clear who made the right bet. The challenge for Cope will be figuring out a way to stem the losses.

Back around 1990, when Rogers Communications Inc. (which also owns Canadian Business) and Quebec-based Vidéotron started talking up the idea of using the coaxial cables that snake into their customers' houses for something other than delivering television signals, more than a few people thought they were slightly crazy. At the time, cable networks were built in a way that made them very good for sending stuff into homes, but very bad for–in fact, largely incapable of–working in the other direction. By contrast, Bell and the rest of the phone industry had highly developed, fully computerized networks that could already perform an abundance of tricks, at least when it came to voice and basic data transmission.

The skeptics had plenty of fuel for their doubts. Vidéotron's first interactive system (among other things, it allowed viewers to choose alternate camera angles during hockey games) was a bust with subscribers. (That probably was related to the fact that the system involved using a remote control so complex that it might do double duty for operating a Candu reactor.) Rogers, in a blaze of publicity, joined a number of U.S. cable giants in signing on with Microsoft in a plan to create a dazzling, all-new form of interactive television. But by the end of the decade, that scheme quietly slipped away without a single commercial product ever being developed.

Despite what we were told, to the point of illness, the Internet has not changed everything. But the cliché does hold when it comes to the impact of the Net on the cable and phone industries. When residential Internet adoption began to take off in the late 1990s, the gain for the cable companies was immediate. Sending Internet connections along with TV signals into customers' houses instantly gave them a two-way network for a fraction of the cost of the switched networks that are the essence of Bell. For Bell, the challenge was similarly obvious. The rise of the Internet had made the seven million lines connecting it with its customers woefully inadequate.

The coaxial cable that gives cable companies their name was actually invented by Bell Labs to move long-distance phone calls in 1929. But Bell still connects to most of its customers with twisted pairs of copper wires, which hail from the era of the telegraph. By comparison, coaxial is tomorrow's technology–at least in terms of how much data it can carry.

As a result, Verizon decided to leapfrog cable. By next year, it will have ripped the copper wires out of three million customers' homes and businesses. It will have replaced them with fibre, which has a theoretical capacity much greater than any household can swallow for at least the foreseeable future. In Texas, that means the company will be offering 180 digital music and video channels, 1,800 video-on-demand titles, and 20 high-definition channels–for about US$40 a month. All that and, of course, Internet and voice service. The move into video by Verizon, however, isn't cheap. Most analysts believe the fibre conversion costs about US$1,000 a household.

While Rogers and Vidéotron move into phone service, Bell's only attack against their businesses is its ExpressVu satellite TV service, which has its own technical challenges. (One source of entertainment this fall on my street in downtown Ottawa was the seemingly endless efforts of two neighbours to position their ExpressVu dishes in a way that gives them a clear sightline to the southern horizon. The most successful of the pair says he still can't watch TV when it rains.)

Digital imaging and music downloading are also revealing the shortcomings of twisted-pair to Bell's high-speed Internet service customers. The Toronto-based Convergence Consulting Group estimates that 45% of Canadians buy Internet service from their cable providers, while the figure drops to 23% for telephone companies. Speed, not price, is cable's chief attraction.

And while buying phone service from the cable company is still a novelty, there are already indications it is also an easy sell. Despite phone-over-cable's very limited availability, Convergence estimates that by the end of next month, 6.5% of Canadians will be talking through their cable connection. Its forecast for 2007 is 16%.

Bell Canada hasn't ignored its technical limitations, but its response is well short of Verizon's. Between now and 2008, it will push fibre cable closer to residential customers who live in cities along the Windsor-Quebec City corridor. That will boost Internet speeds. But video, particularly high-def TV, will choke when it hits the copper wires on the final run into customers' homes. Bell's answer for that is something of a flashback: an as-yet-to-be developed but much-hyped new video technology from Microsoft.

So what's Cope to do? There's nothing to indicate that Bell is about to embark on a network spending spree. Even it if were, the company is now so far behind it might take years to make much of a difference.

But there is one strategy Bell hasn't tried: buy cable companies. To avoid, or at least lessen, Ottawa's ire, it might be best to stick to looking in Western Canada, where Bell isn't already the incumbent phone operator. If, as seems likely, residential communications are going to be a growth industry for cable, the least Bell can do is get a piece of the action.