Rogers Communications

I. INTRODUCTION (Situational Analysis)

Rogers Communications, Ltd. ("Rogers"), founded in 1927, is one of Canada’s largest communications companies. Presently, it is poised to enter the Internet services market, but is uncertain as to whether or not to proceed.

A. MARKET

The Internet market, a new technology, is in its early growth phase. It is organized by geographic coverage, as national and regional providers (163 in all) vie for customers. Across Canada, 11.1 million households totaling 28.8 million persons own computers, of which 42% have modems. The Internet access market is divided into three alternatives: standard phone, ISDN, and fiber optics. Two networks may be utilized: phone and cable. A majority of users utilize standard phone lines to connect to an internet service provider (ISP), while few users currently transmit over more complicated avenues. Available data suggests that only commercial users are willing to spend on the more advanced, but more expensive, technology. Whether the market will ultimately be profitable for market entrants has yet to be determined.

The ISP market is unregulated. However, national commissions do regulate the cable and telephone industries. Cable technology’s proof of concept was established by a US cable company venture, @Home. Although cable access is not currently available in Canada, the addition of other companies will alter the landscape.

B. COMPANY

Rogers is active and well established in three separate markets: cable, wireless, and multimedia. It is a newcomer to the ISP market, ready to provide a new technology: Internet access via its established cable network. Its financial position is strong. Low fixed costs are the result of existing cable lines, but high installation costs drive up Rogers’ variable costs.

i. Strengths

Rogers is the largest cable television provider in Canada and has a current 2.5 million customer base;
the company has experienced increasing revenues over a ten-year period;
it enjoys a diverse operational structure and a long established history in the communications industry, and;
Rogers has the largest wireless phone service and is the only provider that is licensed to furnish cellular service nationwide;

ii. Weaknesses

Despite its imposing presence in the cable industry and an increasing reliance on cable’s revenue stream, Rogers appears to lack knowledge in taking advantage of available modern technology;
many in Rogers’ management appear disgruntled about web technology’s future;
noting that their company has incurred a significant amount of debt, and in light of the company’s previous capital-intensive projects that yielded disappointing returns, they are likely to resist another expensive venture (expected to be at least $16.8 million) into this infant market;
additionally, Rogers currently utilizes coaxial cable, which, compared to fiber optics, is an inferior technology that still requires a hefty installation/disconnection cost for customers, and;
cable is not portable.

C. COMPETITION

Transmission access comes in different access modes: cable, ADSL, T1, ISDN, and standard phone (Please see Exhibit 2.). Bell Canada and satellite providers (e.g., DirecTV) are expected to enter the cable ISP market. Both national and regional ISPs constitute the competition (Due to its breadth of holdings, Rogers would be classified as a national ISP). There are currently 163 ISPs that operate in Canada. UUNET, iStar, and AOL, the accepted national providers, offer a combination of flat and metered rates and charge modest installation costs (typically $19.95; Please see Exhibit 1.). All of these providers use telecommunication networks with various speeds, depending on the modem capabilities (14.4 to 28.8Kbps).

i. Opportunities

Internet technology offers many opportunities that include:

an evolving internet and world wide web technology that is already witnessing fast growth and has high growth potential;
the providing of bundled services;
the fastest means of access with open video;
distinctive and higher quality telecommunications infrastructure, as compared to phone modems;
faster transmission rates because of cable infrastructure’s wider bandwidths;
high entry cost of entry for would-be cable ISPs
fast growth in internet commerce;
is benefited by an existing US market (proof of concept), and;
24 million users in the US and Canada.

ii. Threats Threats include:

the prospect of Canadian deregulation, which would result in new competition;

the prospect of new costly regulations, courtesy of the Canadian Radio-Television and Telecommunications Commission (CRTC);

the issuing of two new licenses to competitors (One, DirecTV, is already a major force in the US market and offers a broad array of programming choices. Another, Bell Canada, expected to be a potent competitor, as it owns the telephone network, enjoys significant brand recognition, and can provide a bundle of services.);

forced universal service may result from duplicative cable threat;

regulatory prohibition of use of revenues to fund other competitive operations;

rapidly changing technology threatens existing cable technology with obsolesence (e.g., ADSL utilizing phone lines has faster speed than cable modems.);

acceptance of standard phone networks makes market penetration difficult, and;

growth of industry and future profitability difficult to estimate.

II. EVALUATION OF MARKET STRATEGY

Rogers currently offers cable service to the Canadian mass market. Being the largest national cable provider enables Rogers to enjoy significant brand recognition. Entering the ISP market would require the company to market its use as a new technology. Rogers may have to use promotions to return an acceptable customer satisfaction level, although its vast media holdings permit it to market its new technology at low cost. Currently, Rogers’ natural monopoly on cable service means that large expenditures are not necessary for its marketing strategy.

III. PROBLEM IDENTIFICATION

Canada’s largest television and cellular telephone operator aspires to become the first cable provider to provide Internet services using its existing cable network. Rogers has the opportunity to exploit a growing yet unpredictable market segment. However, market inexperience and previous project disappointments have created an internal quandary as to which approach the company should take to the ISP market.

IV. ALTERNATIVE IDENTIFICATION

A. CONVERGENCE With a 2.5 million subscriber base to solicit for a bundled cable network featuring telephone, television, and ISP, the convergence strategy enables Rogers has the opportunity to attract existing customers to its internet offering. Moreover, the cable subscriber network is larger than the personal computer network (Please see Exhibit 3.). As noted earlier, the proof of concept exists in the US market. As judged by speed, cable enjoys a superior cost/benefit analysis (Fiber optics (T1) is faster; however, the cost is prohibitive to all but commercial users.).

There are higher initial costs for both the company and the customer and the ISP will need to utilize different customer equipment on the premises since cable modems will be needed to connect to the network. Additionally, Rogers will need to change its billing structure to account for combined services.

Benefits to the customer include one-stop shopping for communications connections and long-run cost minimization due to economies of scale benefits (Exhibit 3). The latter combines necessary services such as telephone and Internet, leading to artificial customer dependence.

In turn, Rogers, the first cable ISP, obtains quicker market penetration with growing technology. It could cross-subsidize the higher installation and modem costs by using the revenues generated by the bundled services (i.e., value-added services). Its marketing strategy becomes simplified.

Accordingly, the convergence method would permit Rogers to enter a new market, which takes advantage of a structure, which is familiar to the company.

B. SECOND ENTRANT By not entering the ISP market immediately, Rogers has the opportunity to concentrate on its existing communications ventures. The second entrant strategy enables it to reduce capital expenditures for Internet cable technology. Instead, Rogers is more likely to generate future profits by learning from the first entrants’ problems associated with new untested technology and pricing of services. Furthermore, Rogers continues to follow the US market to become more experienced in Internet services and web technology.

V. RECOMMENDATION

Cable competition is increasing. Bell Canada and satellite providers are likely to erode a portion of Rogers’ existing customer base. To defend its turf and gain additional subscribers, Rogers must be proactive in increasing the cable network’s services. Accordingly, Rogers is advised to pursue the convergence alternative.

Rogers’ existing cable network may be utilized as an ISP market network, which has 2.5 million subscribers who would be well-served from bundled services. Based on focus group assessment, the appropriate strategy is to target the aware and high-tech segments. However, technology’s high cost mandates a smaller test group, such as executive Frank Cotter’s February 1995 plan (WAVE).

How does WAVE get properly financed? Cross-subsidization. This particular ISP investment requires an estimated 15 months to pay back the investment on cable Internet service for each subscriber (Attachment 3). To be competitive, many consumers indicate that $49.95 for (not unlimited) monthly access and $100 for installation are ceilings, with the latter being the more formidable barrier (A two-tiered approach to attract commercial subscribers and hardcore jocks, who are more likely to pay more for a flat rate fee may also be considered.). Since a bundling of services would benefit the entire cable population, a variation of Cotter’s proposal would be applied, increasing expenditures by $12.4 million. When spread across the cable subscriber spectrum, this results in an estimated 41 cents per month in additional fees.

If profits are not realized within one calendar year and Internet service demand has not increased by 10%, then Rogers may shift its focus to the second entrant strategy.

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