Groupe Vidéotron Lté

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Groupe Vidéotron Ltée.

2000 Berri St.
Montreal, PQ H2L 4V7
Canada
(514) 281-1232
Fax: (514) 985-8425
Web site: http://gvl.videotron.com

Public Company
Incorporated: 1964
Employees: 4,000
Sales: C$846.93 (1996)
Stock Exchanges: Montreal
SICs: 4830 Radio & Television Advertising; 4841 Cable & Other Pay TV Services

Groupe Vidéotron Ltée. is a diversified telecommunications company providing cable television services, broadcast television programming, and interactive multimedia services, including Internet access. Vidéotron’s primary market is French-speaking Canada, where the company holds a leadership position in both the cable and broadcast television markets. In Canada overall, Vidéotron is that country’s second-largest cable television operator, behind Rogers Cablevision Ltd. The company’s broadcast television holdings include the French-speaking TVA Network, and Tele-Metropole, a programming production group that includes Quebec’s CFTM in Montreal, the leading private television station of French-speaking Canada. Vidéotron’s June 1996 acquisition of CFCF Inc. added that company’s 900,000-subscriber cable TV operations, CF Cable TV, and top-rated television station CFCF-12, extending Vidéotron’s reach into English-speaking Quebec as well. Vidéotron also owns a chain of video rental stores, called Superclub Vidéotron, with some 40 stores in Quebec, making it the largest video rental chain in that province.

Long led by founder, CEO, and chairman Andre Chagnon, Vidéotron has built a cable system with some 1,500 kilometers of fiber optic cable and more than 1.5 million subscribers—and a penetration of more than 66 percent—primarily in the Quebec region of Canada. The cable subsidiary provides more than half of the parent company’s 1996 C$847 million revenues. But Vidéotron’s cable system offers more than the standard package of cable television networks and programs. While the rest of the world has dragged its feet, Chagnon has led Vidéotron firmly into the untested waters of interactive television. After creating the world’s first interactive television service, Videoway, in the first half of the 1990s, Vidéotron is now looking to expand the company’s interactive programming. Under the moniker “Universality, Bidirectionaltiy, and Interactivity,” or UBI (pronounced “you-bee”), Vidéotron has joined with Canada Post, the National Bank of Canada, Loto-Quebec, Hydro-Quebec, and the United States’ Hearst Corporation to launch a true two-way interactive television technology. By mid-1997, UBI has been placed in more than 10,000 homes, with plans calling for more than 80 percent penetration of Vidéotron’s subscriber base within five years. Vidéotron’s investment represents 30 percent of the UBI system.

Vidéotron has been less successful in developing its international operations. In 1996 the company began pulling out of the UK, where it provided cable television and other telecommunications services to the greater London area through its 55 percent ownership of Vidéotron Holdings Plc. Vidéotron also provides wireless cable and private cable television services to the United States, through two joint ventures, Wireless Holdings Inc. and OpTel Inc., primarily in the Florida and California markets. Vidéotron, however, has been attempting to exit these markets as well.

Founding a Cable Empire in the 1960s

Chagnon, a graduate of French Canada’s vocational school system, built his first business, an electrical contracting service, in the late 1950s and early 1960s. A large share of that company’s business was in laying coaxial cable for the still-emerging cable television industry. In 1964, however, Chagnon— after reading an article claiming that cable television would become a recession-resistant industry—decided to sell his business and enter this new industry. At the age of 32 and with $1 million from the sale of his electrical contracting company, Chagnon established his own cable television operations, called Le Groupe Vidéotron Ltée, in Montreal, Canada. While building his new business, Chagnon also went back to school, attending night classes and earning a business degree from the University of Montreal.

Until 1980, Vidéotron remained a relatively modest operation, reaching revenues of C$15 million on a subscriber base of just 80,000. But Chagnon determined to expand the company. Reaching an agreement for financial backing from Le Caisse de Depot et Placement du Quebec, which gave the Quebecois government’s official fund manger a 27 percent voting stake in Vidéotron, Chagnon purchased a far larger competitor, National Cablevision, for $14 million. The purchase paved the way for the company to expand rapidly through the 1980s—and by the end of the decade the company had acquired some 35 cable companies, building a network of more than one million subscribers with more than C$421 million in revenues. Meanwhile, Canada itself had become one of the most-cabled countries in the world, with a penetration of some seven million of the total 9.6 million Canadian households.

By then, too, Vidéotron had gone international. Chagnon first attempted to bring his French-speaking services to France. But legislative impediments in that country—cable operators were required to offer services through third parties—thwarted Vidéotron’s 1985 French entry; cable television’s penetration in France would remain stalled until well into the 1990s. Instead, Chagnon looked to Great Britain, where legislation enacted in 1987 at last opened the potential for offering television programming services beyond that country’s four channel (the two public, fee-based BBC channels and two privately owned channels) television system. In 1989, the company’s 61 percent-owned joint-venture with Bell Canada Enterprises Inc., Vidéotron Holdings Plc., was awarded franchises in London and in Southampton-Winchester, with a potential reach of more than one million subscribers. The company began building a cable infrastructure, and by 1990 had already connected some 1,000 subscribers to its 30-channel cable offerings.

An Interactive Vision for the 1990s

Chagnon was not content merely to provide traditional television programming. As early as 1980, he reasoned that television could offer a variety of multimedia services, and, particularly through cable, held the potential of providing an interactive experience to viewers. Vidéotron started out by offering services such as entertainment listings, a dating service, and real estate and employment advertising. A person trying to sell their home, for example, paid $350 to place an ad consisting of 10 or more slides of the house, along with text and voice descriptions of the property. If the property sold, the homeowner paid Vidéotron an additional $2,000. The dating service also proved popular, attracting some 3,500 members by the end of the decade.

Chagnon’s vision, however, looked beyond such relatively passive services toward a richer interactive television environment. In 1986, Vidéotron purchased Tele-Metropole, a Quebec-based broadcaster with an eye on producing the programming it needed for future interactive services. And by the middle of the decade, Chagnon had found the technology to support his vision. Vidéotron obtained Canadian and European licenses for an interactive television technology developed by ACTV Domestic Corp. in 1987, and the following year purchased shares in that company. Vidéotron itself worked with ACTV’s technology, investing some $43 million to develop its Video-way terminal.

Consisting of a set-top unit, which incorporated a cable converter and a small computer processor, a keyboard, and a remote control, the Videoway service would offer as many as 120 services, ranging from on-screen caption and subtitling to weather reports and other information services. But the true thrust of the service was in its interactive programming. Using four buttons on the remote control, a subscriber could choose from among four channels broadcasting simultaneously. During a sports event, for example, the subscriber had the ability to choose from several camera angles from which to view the event, or from a channel offering continuous instant replays. Subscribers, who paid a fee for the service on top of their regular cable bill, could also tailor a news broadcast to their interests, bypassing the sports reports, for example, in favor of more business news. Viewers were also able to participate in game shows, competing against players in the studio. Viewers would also be able to download and play a range of video games. While the service was still limited to one-way communication—the route back was made through the telephone, the Videoway terminal was able to switch instantaneously among the four channels, giving the viewer a feeling of interactivity.

Vidéotron was not the only one interested in interactive television. Other companies were testing interactive technologies, including the ACTV and Videoway systems in the United States. But Vidéotron was the first to go beyond testing and actually roll out the service to its subscribers. Videoway was launched in September 1989, and by September 1990 the service had been placed in 25,000 homes in Canada. That number more than doubled by the beginning of 1991. By 1995, the service had penetrated some 26 percent of Vidéotron’s Canadian subscriber base, representing nearly 320,000 homes. The service had also been introduced into England, reaching some 100,000 of Vidéotron’s 500,000 UK cable customers. By the mid-1990s, Videoway represented approximately 10 percent of the company’s revenues, which gained steadily, nearing C$580 million by 1993.

While Videoway represented a breakthrough in television programming, it remained essentially a one-way transmission, and not the two-way, truly interactive experience that had captured the industry’s attention. And as early as 1993, Vidéotron seemed under threat to be passed by in what was still believed to be the coming interactive television age. Other companies, including Time Warner and AT&T, were developing true two-way television technologies. Vidéotron, in order to upgrade its own system, was faced with an investment of some $250 million. Chagnon went in search of partners, lining up some 50 companies, such as Sears Canada and Quaker Oats, to provide direct marketing services, and attracting interactive services from the Canada Post and Banque National du Canada.

A year later, however, Vidéotron switched tracks. Instead of upgrading Videoway, which the company now dubbed its “Phase I” interactive system, the company instead eyed developing an entirely new interactive system. Forming a consortium, dubbed Universality, Bidirectionality, Interactivity, or UBI, with Canada Post, Banque National du Canada, Hearst Corp., Sociétés des Loteries du Quebec, and the Hydro-Quebec, the government-owned utility, Vidéotron announced its intention to develop a new set-top interactive television device. The “Phase II” device, based on a PowerPC processor, would operate through a 750 Mhz bandwidth along fiber optic cabling, using both analog and digital signals, and the newly developing MPEG II video compression standard. Set-top units would be equipped with smart card readers to enable secure financial transactions. Unlike the fee-based Videoway service, UBI was to be provided free to Vidéotron’s cable subscribers, with the devices and services paid for by advertising and revenues generated through use of the interactive services.

UBI attracted strong interest among service providers, which saw the ability to incorporate interactive services as part of marketing and advertising promotions. Among the services to be included were yellow pages listings provided by Hearst Corp., email messaging service provided by Canada Post, and online banking provided by Banque National du Canada. In March 1994, UBI took a step forward when Vidéotron and IBM reached agreement to develop the set-top box technology. IBM later withdrew from the partnership, leaving Vidéotron to complete the development of the UBI system. Rollout of UBI was initially planned for January 1995 in the small northern Quebec city of Chicoutimi, with plans to reach an 80 percent penetration rate of the company’s subscriber base by the year 2002. The cost for implementing the service to this extent was estimated at C$750 million.

While Vidéotron was developing UBI, the company was also extending its range. In August 1994, the company’s Wireless Holdings joint venture with Transworld Telecommunications Inc., of Salt Lake City, acquired wireless cable licenses in California and South Carolina, adding to its wireless cable franchises in San Francisco, San Jose, Spokane, and Tampa. Later that year, the company’s Superclub video store subsidiary acquired Video Supreme, a Quebec-based chain of 15 stores. In the U.K., the deregulation of the telecommunications industry enabled Vidéotron to begin offering telephone services to its subscriber area, which included the Westminster financial district of London. By then, Vidéotron had built the largest fiber optic network in England, and its cable service was the largest in London, with a potential reach of more than 1.2 million households. Its actual subscriber base, however, totalled only slightly more than 105,000 cable subscribers and just under 90,000 telephone customers.

UBI missed its targeted start date. Meanwhile, the company was preparing a new move to build its cable television group. In November 1995, Vidéotron reached an agreement with CFCF to swap assets in a deal worth some C$530. Under the deal, Vidéotron would acquire CFCF’s 900,000 cable subscribers in exchange for Vidéotron’s 10-station Tele-Metropole holdings. That deal quickly hit a snag when a third cable company, Cogeco Inc. launched a takeover bid for all of CFCF, forcing Vidéotron to make its own takeover offer. In June 1996, Vidéotron won the takeover battle, and acquired CFCF for C$367 million in cash. The takeover agreement also provided for Vidéotron to assume CFCF’s debt of more than $220 million.

The addition of CFCF’s holdings boosted Vidéotron to its position as the number two cable operator in Canada, while giving it a lock on cable and broadcast services to the country’s French-speaking population. Included in the deal was CFCF’s Quatre Saisons television network, which Vidéotron sold off in April 1997 to satisfy Canada’s television regulating body. Meanwhile, the unforeseen purchase put a strain on the company’s finances. In order to absorb the CFCF acquisition, Vidéotron decided to exit the U.K. cable market. After spending some $800 million building its U.K. infrastructure, while achieving only a 21 percent penetration, the company sold its 55 percent stake in Vidéotron Holdings to Bell Cablemedia for $600 million in October 1996. Vidéotron also began looking to sell off its U.S. wireless cable holdings.

The UBI launch was finally readied for September 1996. The success of interactive television remained to be seen, particularly with the promised advent of increased Internet-based video and data technologies. But Vidéotron had not neglected that market. In April 1996, the company joined with several leading Canadian cable companies, including Rogers Communications, Moffat Communications, Cogeco Cable Inc., Access Cable, and Regina Cable, to form Vison.com with an eye on developing the nationwide, standardized cable network providing Internet, telephony, and interactive television services. As the technology prepared to advance, Andre Chagnon’s vision of interactive television seemed more than a possibility— and Vidéotron was prepared to see it through to reality.