Internet Stocks
Dateline: 4/26/99
If you live in an area served by Rogers Cable, you've probably seen or heard their ads for their Rogers@Home service. Two kids bragging about their Dads. It comes out that one of the Dad's uses telephone dial-up access. "What?" says the other kid. "Your Dad uses the telephone to get on the Internet?" and laughs and laughs.
It's a powerful ad and the implication is clear. Cable modem Internet access is the wave of the future. In fact, when Rogers first introduced its cable modem access, it was called The Wave. They subsequently joined the @Home Network partnership along with Shaw Communications.
The cable companies were smart enough to see the need for high speed Internet access and moved quickly to fill this need. Although the telephone companies have the ability to provide high speed access with Asymmetric Digital Subscriber Line or ADSL, they have been slow to implement this feature and it is available in only a few test areas.
The reason for this is that ADSL speed decreases with the distance from the local telephone loop. Access speed drops by 80% if the distance is increased from 9000 feet to 18,000 feet. So ADSL needs a switching loop within two miles of your home for it to be effective. That's a lot of infrastructure to build. And consequently it has been available in selected test areas only.
For a good outline of the technical aspects of cable modem access check out the Technical Page at Rogers website.
Of course, the phone companies have not been sitting idly by. They have the most popular ISP in Canada with their Sympatico system and have recently introduced their High Speed Edition, a Splitterless ADSL service that uses a 1 meg modem, continuous connection, and simultaneous use of your telephone and fax. They're pricing this competitively with cable modem service, but it is only available in selected areas.
You might compare cable technology versus ADSL with the battle between Tesla's alternating current and Edison's direct current when electricity was being developed. (In fact, business analysts Michael Campbell has compared the significance of the Internet to the development of electricity.) Direct current, like ADSL, loses strength the farther you go from the generating station. AC maintains constant strength over huge distances, like cable access.
We know who won the electricity wars. But ADSL isn't dead yet. The telcos have a lot of financial clout and a lot of R&D money. We may well end up eventually with a dual system.
In any event, the winners will have to be able to provide bandwidth so customers can access real-time video. Yahoo recognized this with its significant acquisition of Broadcast.com recently. Cable, of course, was built on bandwidth. Cable television systems have supplied real-time multi-channel video for years.
In Canada there are four major cable companies providing Internet access in Canada. All are publicly traded. Here's a quick look at each.
Rogers is a large media conglomerate that includes cable systems , wireless communications and media. Besides cable television and Internet access, the cable division includes over 200 Rogers Video stores. Although founded as a cable TV operation, the wireless communications division now generates more revenue and Rogers is the only company providing coast to coast service with its Rogers Cantel - AT&T partnership. The media division includes 20 radio stations, a television station, 16 magazines and 45 business periodicals.
The cable division is the most profitable. And it may once again surpass the wireless division in revenues as the demand for high speed Internet access continues to grow.
After being in the doghouse for a long time, Rogers share price exploded this year, more than doubling since January 1st as re-organization and a strong foray into the Internet have started to pay off. As one of the first two Canadian cable systems to join the @Home Partnership, Rogers is a major shareholder in the American company.
Shaw is the other Canadian cable company that pioneered the @Home system in Canada. This communications giant includes eleven radio stations and two specialty television stations, YTV and CMT. YTV specializes in children's programming and CMT is Country Music Television. Shaw acquired majority control in WIC Western International Communications about a year ago. The disposition of WIC's assets between Shaw and Global Television (the ownership ratio is about 51-49) has yet to be resolved, but it includes nine TV stations, twelve radio stations and a 54% interest in Canadian Satellite Communications. The television assets include BCTV, one of the most lucrative television properties in Canada, as well as Montreal's premier English language station CFCF TV and Hamilton's ONTV.
Shaw, like Rogers, owns a substantial interest in @Home despite having sold off a large chunk not so long ago.
Cogeco is the most recent addition to the Canadian @Home partnership. Canada's fourth largest cable TV operation, Cogeco serves Ontario and the three westernmost provinces as well as its home base of Quebec. It owns four TV stations in that province as well. Besides cable Internet access, it also provides dial-up service. Its stock has more than doubled since mid-October.
This Quebec based company is probably the most diversified of these communications companies with interests in the U.S. and U.K. as well as Canada. Its American interests include a cable TV station and private telephone company. It has majority control of TVA Group, Quebec's largest private broadcaster with six television stations. Its cable interests dominate Quebec's two largest markets, Montreal and Quebec city, and it operates in thirty communities in Alberta, including Edmonton. It is also a leader in security services with its Protectron division.
Although not part of the @Home group, Videotron offers cable modem access and is a pioneer in interactive television (including pay-per-view) with its Videoway system.
All of these four companies have major interests in Internet access and stand to gain from Internet growth. Shaw and Rogers also stand to gain from their large equity positions in @Home. I've added Cogeco and Videotron to my Canadian Internet Stocks Average, and have created a sub-index for the cable companies in the chart. More sub-indices will be added over time.
Be sure to check the links below for more information on the prospective growth of this industry.
Yahoo! buys Broadcast.com in countdown to broadband - April 2nd article from The National Post details Yahoo's acquisition of Broadcast.com.
Telecom deal sounds bell for U.S. cable invasion - March 26th article from The National Post argues that the recent merger between BCE and Ameritech foreshadows similar moves in the Cable TV industry.
Cable poised to take the lead - March 20th article from The National Post about a U.S. report predicting cable companies will make great inroads into the telephone business.
@Home International - This U.S. @Home Network page gives a short history of its alliance with Canadian and other international cable TV companies.
Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions. The author owns shares in Shaw Communications.
Updates:
An update to the Pundit Report includes short overviews of recent comments from Brent Woyat at Canaccord and from the Cabot Market Letter's Carlton and Timothy Lutz.
The Canadian Internet Stock Average has been updated with Friday's closing prices. In addition I've added two more cable companies to the list and created a separate sub-index for the cable companies.
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