As expected, Netflix’s move on Monday night to introduce lower-quality video streaming for us Flinstones-era Canadians got a lot of media attention outside of Canada. But, with Americans being Americans, much of the coverage seemed worried about their own skins – as in, with restrictive internet usage caps being the norm here, are they going to migrate south and will Netflix have to enact similar measures there?
A few weeks ago, I spoke with an official at the Organization for Economic Co-operation and Development in Paris about the global trends regarding internet caps. He said, in unequivocal terms, that the general worldwide trend was toward larger and larger caps, not smaller ones like we’re seeing here in Canada and like the ones pundits in the U.S. are worried about. I’ve talked about this before – how North America’s bucking of the trend has everything to do with the fact that our governments take a largely hands-off approach to managing their internet markets. There are many people convinced that’s the wrong approach to take in such an important field – myself included – but it looks like it’s a lesson we’re going to have to learn the hard way.
In any event, I had a sit-down with Netflix CEO Reed Hastings yesterday, wherein we chatted about the new quality settings, acquiring new content, usage-based billing and lobbying. The full Q&A is up on CBC.ca, so check it out if you’re interested.
Today’s post hits on a related issue. A few weeks back when I wrote about the myths surrounding usage-based billing, a chap calling himself “Investor’s Perspective” stirred up the comments section by supporting Bell’s desire to make more money. The fellow posted anonymously but claimed to be an investment manager who helped oversee billions of investors’ money. Whether he was who he said he was, he made some comments about how big telecom companies are not good investments because they usually don’t see good returns on the amount of capital they sink into their businesses.
Having covered the industry from the investors’ perspective for a number of years, I can’t say I agree with him. While companies such as Bell have not seen much movement in their stock prices for years, they have generally been pretty steady sources of dividends. Both of those phenomena can be explained by the same factor – they’re poorly run companies that make steady money because they enjoy dominant positions in uncompetitive markets. In other words, while the money continues to steadily roll in, there really isn’t much hope for growth, which is why the stock never goes anywhere. As such, while you can’t really get rich from investing in a company like Bell, it certainly won’t hurt your portfolio either.
It’s worth noting that some cable companies, such as Rogers, have historically performed quite differently. Ten years ago, Rogers stock was around $11 a share. Today, it’s more than triple that. Rogers took a pounding back then because it spent and spent on necessary infrastructure, both cable and wireless. Over the next decade, it reaped the rewards and came to dominate Bell and other competitors in almost every area because of that. Investors who stuck with some of these cable companies love them because they did, in fact, make them rich. It’s a classic case of high-risk, high-reward.
There’s a reason for the difference in performance. While Ted Rogers cut a lot of throats in building his empire, all on the back of his own cable monopoly, at the end of the day he was a fiercely competitive entrepreneur. Most big phone companies in the world, on the other hand, were at one point in time government-own monopolies before they eventually spun off into publicly owned entities. And as we all know, nothing is fatter and lazier than a government-owned monopoly.
Those early attitudes are still somewhat present and still drive both types of companies today. Telecommunications markets across Canada and in some other parts of the world have for the past few decades been dominated by the more nimble and hungry cable companies, with the sluggish phone companies doing all they can to avoid being left in the dust.
The reason for Bell’s sluggish stock performance is therefore not some innate nature of the business it is in, it’s because the company is – simply put – poorly run, to the point of being stupidly run.
Need proof? Okay, how about this. The Canadian public is now on high alert about the state of internet access in this country. Nearly half a million people signed a petition that on the surface is against usage-based billing, but which is really an indictment of the larger situation. The government is ticked off and breathing down Bell’s neck. This is, by the way, a relatively right-wing government that strongly advocates letting market forces do their thing. Yet still, the Prime Minister himself is ready to meddle with those forces. Moreover, the whole UBB fiasco has made Canadians more aware than ever that there are other, cheaper options out there as far as internet service providers are concerned. Many Canadians hadn’t even heard of Teksavvy before this mess came along.
So what would be the stupidest thing Bell could do in this situation? What would piss people – especially customers – off even more and drive them to those smaller competitors, as well attract even more attention from politicians of all stripes? Hmm… how about raising prices? Yup, that would be about the dumbest thing the company could do. There’s no way they’d do that, right?
Wrong. That’s exactly what Bell is doing. Effective as of May, all of Bell’s retail internet services are going up by $3. Wow. Just wow.
There are two possible explanations for why Bell would make such a move, which is seemingly daring the government – whoever that may be at the conclusion of our pending election – to give it a good, old-fashioned spanking. One is that the company’s bean counters figured that its revised usage-based-billing proposal will result in less revenue, which are dollars that need to be made up elsewhere. The other possibility is that one hand – the side of the company that sets prices – doesn’t know what the other hand, namely the regulatory people dealing with the UBB fracas, is doing. At this point, I’d lay 50-50 odds on either being the answer. Neither is smart.
I hate to keep bringing up New Zealand but I swear this is like watching a rerun. The big phone company there kept making similarly moronic moves like these until the public and the government just couldn’t take it anymore. The company, Telecom New Zealand, was subsequently forcibly broken up into three pieces, thereby losing more than half its stock value. For the longest time, I haven’t thought that could happen here, but perhaps I’ve been underestimating just how stupid some companies can be.