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Bell adopts a new party line

From Saturday's Globe and Mail

Michael Sabia has a mission that he shares with his most bitter rivals: He wants to destroy telecommunications giant BCE Inc. "What we are doing in our business, and what any telecom company has to do to survive and be prosperous, is engage in self-inflicted creative destruction," says Mr. Sabia, BCE's president and chief executive officer.

He is borrowing a concept from a favourite economist, Joseph Schumpeter, who saw the capitalist economy as being in a state of constant tumultuous renewal through the death and birth of companies.

In an interview, Mr. Sabia portrayed himself and his management team as agents of destruction, blowing up the culture and structures of its Bell Canada unit to prepare for a world when technological boundaries between landline, TV and wireless networks will disappear.

Yet, that is not the image that BCE often presents -- a lumbering behemoth trying to find its way in a rapidly evolving industry. Mr. Sabia commands a rich cash flow from Bell's landline phone franchise. But this mature asset faces the biggest competitive threat in Bell's 125-year history -- the warp-speed rise of the Internet as a core telecommunications medium.

Mr. Sabia assumed the CEO's job three years ago, when the company was reeling from a spate of disastrous investments.

At that time, he was expected to shed non-core assets, keep costs under control and not do anything stupid.

He succeeded at this mandate, and boosted the all-important dividend. But now some detractors are looking for a greater vision of Bell's future beyond the technological changes imposed upon it.

Certainly, investors have mixed views of the stock, an old favourite of ordinary Canadians. In the 1990s, BCE rode the telecom frenzy to impressive annual returns -- until the bubble burst under former CEO Jean Monty. The installation of Mr. Sabia in 2002 halted the stock's decline, but in his tenure, BCE shares have slightly lagged the Toronto Stock Exchange composite index in total returns.

Now, a mood of anxious expectation gathers around BCE, as it deals with something called Internet protocol (IP). That technology is shaking up telecommunications as people can now make calls over data networks. IP has opened the local phone market to a flood of new competitors, including cable-TV operators.

Mr. Sabia says BCE's transformation won't happen overnight. "You don't take a business that is built for one world and turn it into a business that is going to catch the next wave of telecommunications, and do it on a quarter-to-quarter basis."

His dilemma is illustrated by his early moves into the newest way to communicate, through computers using technology called voice over Internet protocol (VoIP). It could cannibalize Bell's old circuit-switched phone service. "Are we going to be a player in VoIP? Absolutely. Are we going to be prepared to disrupt our own business? Absolutely, Why? Because if not, somebody else will," says Mr. Sabia, who drives home his points with animated hand gestures.

That somebody looks more and more like Rogers Communications Inc., whose founder Ted Rogers is leading the cable-TV company's charge into the phone market.

Last year, Rogers snapped up Microcell Telecommunications Inc. to become Canada's largest wireless carrier. It followed up this week with a bid for Call-Net Enterprises Inc., which will launch Rogers into the local phone market in Bell territory. And Rogers' own VoIP service will come later this year.

Also this week, the federal telecom regulator ruled that Bell and other major phone companies' VoIP service will be regulated, but not new entrants to the market.

BCE director Ed Lumley says Mr. Sabia is facing challenges from both traditional rivals and new smaller players as he tries to run his business with "the technology changing by the hour."

Mr. Lumley says the CEO can be extremely demanding as a boss. "He is not easy to work for." But he and other observers say that is balanced by stamina and quick intelligence.

Indeed, a reputation for earnest intensity has followed the 51-year-old Mr. Sabia, a Yale-educated economist, in his career path through the federal public service and Canadian National Railway. His mentor is another Type A manager, Paul Tellier, a former top civil servant and Bombardier and CN CEO.

Lawyers, investment bankers and colleagues who have worked with Mr. Sabia say he constantly juggles the need for action with an ingrained caution. "No one doubts Michael's intellect. But by personality and by virtue of his civil service years, he's more focused on limiting the risk of failure than he is in embracing opportunities," says one long-time adviser to the company.

He adds that "most CEOs look for the upside, they look for reason to act. Michael worries about the downside."

That measured approach was deemed a positive trait in April, 2002, when he took the CEO reins from Mr. Monty, a bold visionary whose dream of converging content with network carriage collapsed on a disastrous $7.5-billion investment in international carrier Teleglobe.

Mr. Sabia says one break from the past is that, historically, BCE chief executives tried to diversify away from Bell Canada and its regulated phone business. "If we've changed anything, the perspective is now don't diversify away from Bell -- reposition Bell, fix Bell, transform Bell, add to Bell, strengthen those capabilities because that is what you know as an organization, that is what you are good at."

Mr. Sabia insisted he is not deficient on the vision front: He aims to build one of the world's greatest telecommunications companies. He offers an image of convergence that carries echoes of his predecessor's dreams, although without the grandiose and expensive scale.

Using Internet technology, BCE will provide seamless communications across devices -- personal computers, laptops, cellphones, personal digital assistants and television sets. The second theme is to assemble a coherent array of entertainment, information and business applications to send across all those gadgets.

Mr. Sabia says he is building a company that can gain access to huge growth opportunities. While the company now focuses on about 4 per cent of household spending, it aims to win a greater share by pushing into new areas, such as home networking and interactive entertainment. He sees similar possibilities in the business market.

But to take advantage of the possibilities, he needs to present the telephone company with a set of options on the future. "In a world of uncertainty, the best hedge against uncertainty is options," he says.

The need for diverse options was also one of Mr. Monty's priorities, but Mr. Sabia points out that there is a difference between options and big bets. "What is incoherent is a strategy that says: 'Oh, and by the way, bet the farm on every one of them.'

"But those measured options contrast with the competitive challenges BCE faces as rivals such as Rogers make bold moves, and a flock of new entrants are bidding to chip away at the phone giant's market share with their VoIP services, some of which are steeply discounted.

Down the road, Mr. Sabia predicts that some customers will stay with the old circuit-switched service because of its reliability, others will have two phone lines, including one with VoIP, and the rest will move immediately to VoIP because of the new features, such as forwarding voice mail to e-mail accounts.

While Mr. Sabia sees a lot of opportunity for growth in IP, which is ushering in new services, such as TV over phone wires, he recognizes the challenges ahead. He is upgrading the company's network to offer new products, but which will have lower margins. For that reason, he is overseeing a major cost-cutting effort, designed to pare as much as $1.5-billion in expenses by the end of 2006 -- a flashback to his CN days.

But not everyone sees the same growth prospects in VoIP services. "It's going to be difficult to squeeze new revenue out of customers on the residential side," says Standard & Poor's Corp. analyst Joe Morin.

Mr. Sabia argues that, over the long run, VoIP won't be about price: The winner of the war will be the one who can deliver the service and features that customers want.

He's still upset about recent billing woes at Bell Mobility and the resulting customer service fallout at the wireless unit, which came at such a critical time in Bell's transition.

In the wireless business, Mr. Sabia is juggling a few options, such as a joint venture with Virgin Mobile, an edgy cellphone company that targets the youth market, including Bell Mobility customers.

Some industry observers question the wisdom of that partnership, saying it is competing with itself for the same customers. But Mr. Sabia responds that the company didn't really have a choice: It would partner with Virgin Mobile or a rival would. "Are we going to sit like King Canute and try to roll back the waves? Or are we going to say: 'This is the way the world's going to be so let's get used to it'?"

By contrast, Bell's $100-million (U.S.) investment in Clearwire Corp. offers an entry into a new market. Clearwire, headed by wireless pioneer Craig McCaw, is rolling out wireless high-speed Internet services in the United States, a technology that Mr. Sabia says is part of "the next tsunami" in telecom.

The investment gives Bell a window into a technology that Mr. Sabia expects will make a big splash. "It's all about be out there on the frontier, be out there on the edges, where the nerve endings are, where you can learn things."

With such a sprawling set of options, and with technology changing so rapidly, Mr. Sabia is impatient with the question of what is core and what is non-core. That question, he says, is like doing surgery with thumbs. "It's better to do surgery with your fingertips, because the world is not simple and thumbs are simple."

He uses that analogy in response to whether BCE will continue to own Bell Globemedia Inc., the content company that contains The Globe and Mail and the CTV television network. Once described as an expendable asset, it continues to sit in BCE's portfolio.

Mr. Sabia insists that his views are consistent: BCE is determined to keep access to key elements of that content, but there is no easy answer to how to do that. He says he will have to work through those issues with Globemedia's minority partner, the Thomson family.

Rather than thinking about what is core, he finds it more compelling to identify the things he needs to build "a really great business." His job at BCE, he says, is deciding how to allocate capital in the interests of securing those things.

In changing BCE's culture, he relies on innovation guru Clayton Christensen, the Harvard Business School professor who wrote The Innovators Dilemma.

"He comes up, he talks to our folks. He comes in and talks about disruptive change, because that is what's going on." Mr. Sabia has also brought in people from Eastman Kodak Co., which has grappled with such change.

Mr. Sabia clearly sees the change coming.

But by avoiding big bets, there is the danger that he will not allocate enough capital to the things that will pay off big, and that BCE will never fulfill his dream.

That fear may be enough to push this student of Schumpeter to inflict even more creative destruction on a company he was hired to stabilize.

Short on change?

Michael Sabia says BCE needs to keep its various options in play in order to hedge its bets and take advantage of future opportunities. To that end, he is pushing the firm's various divisions into new markets and is contemplating spinning some off. His critics, however maintain the pace of change is too slow.

Cost cutting

Challenge: As Bell moves into the world of Internet protocol (IP) telecom services, Mr. Sabia sees many growth opportunities, but he also acknowledges these new services will be less profitable than the traditional one.

Response: A major cost-cutting program, dubbed Project Galileo, that is expected to slash as much as $1.5-billion in expenses by the end of 2006. A big chunk of those savings will come from Bell switching over to an IP network. But UBS Canada Securities analyst Jeffrey Fan questions whether Bell will meet the top end of that cost-cutting goal as he doesn't expect al businesses will switch over quickly enough.

Television

Challenge: Bell, unlike many phone companies; already has TV experience with its ExpressVu satellite-TV service, which has more than 1.5 million customers. But ExpressVu has had mixed success breaking into some markets, such as apartment buildings. Bell wants to ensure that it can offer all its customers three-product bundles of phone, TV and Internet service, which cable-TV companies plan or already offer.

Response: Through 2008, Bell is spending $1.2-billion to install fibre-optic lines to within 1.2 kilometres of homes, and IP technology will let it carry TV signals the rest of the way into the house over phone lines. However, some analysts question whether the technology will be able to meet the bandwidth demands for services, such as high-definition TV.

Bell Globemedia

Challenge: Mr. Sabia inherited the media unit, Bell Globemedia Inc., from his predecessor. But his plans for the company, which owns The Globe and Mail and the CTV television network, appear up in the air to industry observers. In the past, Mr. Sabia has called Bell Globemedia a non-core asset, but recently has said that maintain Bell's access to that content is strategically important.

Response: Bell Globemedia is doing well, so industry observers say there's no pressure to sell and BCE can wait until it gets a good offer.

Internet protocol

Challenge: IP is ushering in a new era of phone and data services, including VoIP (making phone calls using the Internet) and video conferencing. However, IP is also allowing new competitors to move in on Bell's turf, and they are already luring local phone customers away. And Bell may have less flexibility than its smaller competitors in the VoIP market as Bell's service will be regulated.

Response: Bell already sells IP services to businesses, and in March it launched a discounted VoIP service for customers in three cities in Quebec.

Wireless

Challenge: Bell generates a smaller percentage of its sales and profit through wireless services, leading to lower growth rates than western rival Telus Corp. Mr. Sabia could have added more wireless customers with the purchase of Microcell Telecommunications, which was ultimately snapped up by Rogers Communications, but he was reportedly talked out of it.

Response: Industry executives say there is more growth to come in the wireless industry as roughly half of Canadian subscribe to cellphone service, less than in other countries. But in order to benefit, Bell Mobility has to stay clear of snafus such as last year's wireless billing problems, which frustrated many customers.

"Are we going to be prepared to disrupt our own business? Absolutely. Why? Because if not, somebody else will."

MICHAEL SABIA, CEO OF BCE

© The Globe and Mail

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