Cogeco 2011 Annual Report Download - page 24

Management’s Discussion and Analysis (MD&A) COGECO CABLE INC. 2011 23
Cogeco Cable provides “double-play” and “triple-play” service bundles both in Canada and in Portugal, with various combinations of
Telephony, HSI and Television distribution services being offered at attractive bundle prices, but does not offer “quadruple-play” service
bundles that include mobile communications. Cogeco Cable does not offer mobile Internet service. The Corporation continues to focus on its
existing lines of service with a view to capturing the remaining growth opportunities for HSI, Digital Television and Telephony services in its
footprint, making the most efficient use of its own hybrid fibre-coaxial (“HFC”) plant. As markets evolve and mobility becomes a more cost-
effective substitute to wireline communications, Cogeco Cable may need to add mobility components to its service offerings, through suitable
mobile virtual network (“MVNO”) arrangements with existing or future mobile operators, or otherwise through new wireless alternatives. There
is no assurance that appropriate MVNO arrangements will be concluded by the Corporation when needed, and their impact on the financial
results cannot be assessed at this time. Also, the capital and operating expenditures eventually required to offer quadruple-play service
bundles and mobile services may not be offset by the incremental revenue that such new bundles or mobile services would generate, thus
resulting in downward pressure on operating margins.
In Canada, Cogeco Cable currently faces competition in its service areas mainly from a few large integrated telecommunications service
providers. The largest, Bell Canada (“Bell”), offers through its various operating entities a full range of competitive voice, data and video
services to residential, as well as to business customers in the Provinces of Québec and Ontario through a combination of fixed wireline,
mobile terrestrial wireless and satellite platforms. Bell is actively marketing Internet Protocol Television (“IPTV”) services over its fixed copper
and optical fibre wireline network. Telus Communications Company (“Telus”) competes with all of Cogeco Cable’s services in the Lower St.
Lawrence area of the Province of Québec through the use of its copper and optical fibre wireline network, and throughout Cogeco Cable’s
Canadian footprint through the use of its mobile telecommunications network. However, Cogeco Cable’s Telephony service is provided with the
assistance of certain Telus carrier services through a long-term contractual arrangement. Shaw Direct, the direct-to-home satellite service of
Shaw Communications Inc. (“Shaw”), competes for video and audio distribution services throughout Cogeco Cable’s Canadian footprint.
Rogers Wireless Communications Inc., a subsidiary of Rogers Communications Inc. (“Rogers”), operates a mobile telecommunications network
in Ontario and Québec and is the owner of the Inukshuk broadband wireless network in partnership with Bell. Rogers Cablesystems Inc., the
cable subsidiary of Rogers, is licensed to extend its services in the Burlington, Oakville and Milton areas, which are part of Cogeco Cable’s
footprint in Ontario, although there has not been any significant cable overwiring to date. Videotron Ltd. (“Videotron”), an indirect subsidiary of
Quebecor Inc., offers competitive telecommunications services in Cogeco Cable’s Québec footprint and is actively marketing its mobile
telecommunications services in Québec. Other advanced wireless service mobile telecommunications service operators, including Wind and
Public Mobile, are also operating in the market in Ontario and Québec. Incumbents Rogers, Bell and Telus are responding to new entrants with
more attractive pricing and flexible service options, which may cause substitution between wireline and wireless telecommunications services
to accelerate. Cogeco Cable also competes within its network footprint with other telecommunications service providers, including third parties
using Cogeco Cable’s wireline network facilities pursuant to its third party Internet access tariff.
In Portugal, Cogeco Cable’s indirect subsidiary Cabovisão faces competition for all its lines of business mainly from incumbent
telecommunications carrier Portugal Telecom, SGPS, S.A. (“PT”), Zon Multimedia, SGPS, S.A. (“Zon”), Vodafone, Sonaecom, SGPS, S.A.
(“Sonaecom”), a subsidiary of diversified Portuguese conglomerate Sonae, SGPS, S.A. (“Sonae”) and AR Telecom. Zon, the largest cable
telecommunications operator in Portugal, also offers a direct-to-home satellite distribution service to the Portuguese market. Zon’s cable plant
overlaps the major part of Cabovisão’s footprint in Portugal. Zon also owns extensive program content interests, including equity interests in
several pay television channels distributed by Cabovisão. PT’s national telephone network, PT Communicações, which offers a full range of
fixed and mobile telecommunications services throughout Portugal, is aggressively marketing MEO, its competitive IPTV service, over its
wireline plant, and is offering its own direct-to-home satellite service. In addition, PT has launched in Portugal a new digital terrestrial television
service available directly over-the-air. Sonaecom owns and operates the Clix (residential fixed telephony, HSI and IPTV), Novis (business
telephony solutions) and Optimus (wireless telephony and wireless HSI) services, which provide voice, data, HSI, video and mobile services to
the residential and business markets. Vodafone offers its own video distribution service for bundling with its mobile telephone and Internet
services. Cabovisão, Zon, PT, Sonaecom, Vodafone and AR Telecom all have competitive triple-play offers available in the Portuguese
market. Cabovisão continues to aggressively market its Digital Television services, which include HD channels, throughout its footprint.
Operating margins are under pressure due to the addition of programming services and promotional price discounts required to meet the
competition mainly from large incumbents PT and Zon. Cabovisão and Zon continue to carry a legacy video service on less bandwidth-efficient
analog channels. The competitive television service offerings of the other competitors in the Portuguese market are all digital. PT, Zon and
Vodafone each have a significantly larger overall customer base, and both Zon and PT have a larger video customer base, than Cabovisão.
While several competitors in the Portuguese market are deploying optical fibre facilities to the premises of customers, Cabovisão continues to
focus its investments for network upgrades on completing the deployment of DOCSIS 3.0 technology over its existing HFC platform.
The Portuguese market is facing very difficult times as a result of the government’s austerity program to stem its rising annual public accounts
deficit and bring its national debt to a more manageable level. The austerity measures, including income and sales tax initiatives, are having a
negative impact on net disposable income and discretionary consumer spending. General economic conditions are not expected to improve in
the near term. It is anticipated that the prevailing situation will continue to adversely affect customer acquisition, and RGU gains, and bad debt
experience for the Corporation’s Portuguese operations.
The level of piracy of television signals and the actual penetration of illicit reception of television distribution services in households within the
Corporation’s service areas may also have a significant effect on the Corporation’s business and the competitiveness of its service offerings.
Technological risks
The rapid evolution of telecommunications technologies is fuelled by a highly competitive global market for digital content, consumer
electronics and broadband products and services. The Corporation continues to monitor the development of technologies used for the
transmission, distribution, reception and storage of data and their deployment by various existing or potential competitors in the broadband
telecommunications markets.