In Companies: Netflix pulled us all into the stream, Encana ran out of gas, Target missed the mark, and the government just wouldn't stop sticking their nose in
Out of gas
Once a corporate titan, Encana’s all-in bet on natural gas left it hobbled with debt and scrambling to turn things around
An executive’s job is more exciting when he treads where others have not. But for Doug Suttles, appointed as CEO of natural gas giant Encana in June, the task is to return his faltering firm to familiar ground. He inherited a highly indebted, money-losing company with precisely the wrong asset mix, given the continuing gas price slump. He soon announced Encana will now focus on five oil-and-liquids-rich resource projects—the very sort of assets the company got rid of just a few years ago. He also thinned the executive ranks and announced plans to terminate one-fifth of Encana’s workers and close its Plano, Texas, office. Past glories are all but forgotten.
Contrast that with the experience of his predecessor. Randy Eresman took over in 2006 from Gwyn Morgan, who formed Encana through the 2002 merger of his Alberta Energy Co. with PanCanadian Petroleum. Morgan was practically canonized upon retirement; briefly, Encana surpassed Royal Bank to become the largest Canadian company by market capitalization, and during 2006 it racked up $6.5 billion in annual profit.
But Eresman unwittingly positioned Encana for a fall. Whereas Morgan invested heavily in oilsands, Eresman concluded that investors weren’t awarding those assets the proper respect. Seeking to turn Encana into a “pure play” gas producer, he spun off the oil assets in late 2009 into a new company, Cenovus Energy. “I’ve got a pretty good ability to see the big picture, to really be able to see where things are going,” Eresman told the Globe and Mail early in his tenure.
Eresman’s confidence in his own clairvoyance was misplaced. After peaking above US$13 per million British thermal units in 2008, the New York Mercantile Exchange’s benchmark U.S. natural gas contract slumped to less than $3 over the next year, due to falling demand stemming from a painful global recession. This was compounded by new supply from shale gas fields. Gas prices have languished below $5 per MBtu ever since. While Cenovus rode rising oil prices to glory, Eresman proclaimed and then disavowed several ambitious recovery plans in rapid succession before resigning in January.
Suttles now needs to correct his predecessor’s mistakes, but diversifying will take time. During the first half of this year, more than 90% of Encana’s production still consisted of natural gas. All is not lost, however—Encana still owns plenty of attractive land and remains a low-cost producer, and is therefore well-poised to benefit from any recovery in gas prices. Matthew McClearn
The Year in government meddling
The Conservatives promised to “protect Canadian consumers” in October’s speech from the throne. Translation: more handcuffs for Canadian businesses. Here’s who suffered the most
Manitoba Telecom Services
Industry Minister James Moore blocked the $520-million sale of MTS’s Allstream division to Egypt-based Accelero Capital Holdings. The government cited unspecified “national security” concerns.
Telus twice tried to buy the struggling mobile carrier and the government denied both attempts. A spokesman said Ottawa would reject any proposal that would decrease wireless competition.
The Big Three
The country’s largest telecom companies—Telus, Rogers and Bell—all opposed provisions contained in the “wireless code of conduct” introduced this spring by the federal government. They’ve launched a court challenge against rules capping wireless contracts at two years.
Chinese computer manufacturer Lenovo reportedly considered bidding for BlackBerry, but the Canadian government said it would never approve the sale.
Heritage Minister Shelley Glover in November began a push to force cable companies to offer TV channels à la carte, rather than in bundles. She asked the Canadian Radio-television and Telecommunications Commission to study how to implement the plan.
Loser of the Year: BlackBerry
Last year, we didn't know what to say about the troubled company, so we ran a comic strip. And this year...well, here’s Volume 2. The dialogue’s all real
Sun News Network
The Sun will, amazingly, come up tomorrow
The ratings-challenged news channel was hoping the CRTC might give it a boost when it applied for mandatory carriage this year. Had the station been successful with its application, it could have forced its way into every Canadian home with a cable subscription and gained a few cents per month from each viewer in the process. Alas, the CRTC did not grant Sun its wish. Perhaps even sadder, Sun did not follow through on its promise to die a quick death after its request was denied. A lose-lose year for all involved.
Now with one less variety
Getting bought for $23 billion by Berkshire Hathaway and 3G Capital, two turnaround experts, is bound to make Heinz a leaner, more profitable company in the long run. But it looks like the path to profitability will be a bit bumpy. In Ontario, a strong Canadian dollar put an end to the company’s 104-year-old Leamington, Ont., plant—the same one referenced in the Stompin’ Tom song about ketchup. Heinz will have even more financial “ketching up” (ha ha) to do next year after those clowns at McDonald’s announced they were ending their relationship with the company. Apparently Heinz’s new CEO, Bernardo Hees—the former head of Burger King—isn’t welcome in McDonaldland.
Hung up on competition
The U.S. telecommunication company was highly expected to become a player in the Canadian wireless market this summer, after the federal government relaxed its foreign-ownership rules in a bid to increase competition. Verizon’s eventual decision to stay in its own yard was good news for the Big Three—Bell, Telus and Rogers (owner of this magazine and so many others)—but also good news for Verizon. Entering Canada would have meant dealing with our complex regulatory rules. So instead, Verizon bought Vodafone out of its U.S. business. The deal strengthens both Verizon and Vodafone’s business strategies—and does absolutely nothing for all the Canadians who were looking forward to a lower cellphone bill. Sigh.
Bling in the New Year
The main problem with being the leader in creating life-changing inventions? Being expected to do so again and again. Apple spent 2013 doing little more than upgrading old favourites, but it’s still too early to say whether the company is in a downward spiral. It made $7.5 billion in profit last quarter—and that was despite releasing a gold iPhone. CEO Tim Cook hints an iWatch is coming in 2014. If people take that joke of a product seriously, it will truly herald the beginning of a Jobs-less recovery.
Carnival Cruise Lines
Gives new meaning to “poop deck”
You’d be hard pressed to have a year as bad as Carnival Cruises had in 2012. Not even Carnival could top it—but it tried. After a reckless, incompetent captain capsized a boat off the coast of Tuscany in 2012, killing 32 passengers, Carnival continued breaking shame records in 2013. Fire broke out in the engine room of the Triumph in February, leaving 4,200 passengers stranded for four days with no food or toilets and forced to sleep on deck because their cabins had filled with sewage. That trip of a lifetime was followed by navigation problems on two other ships in March—which is what it finally took for Carnival to admit that maybe, just maybe, it should do a little maintenance now and then.
Streaming’s rising tide
Skyrocketing subscriber numbers and a totally new business model made Netflix the media upstart traditional media outlets couldn’t afford to ignore
Was Netflix in the right place at the right time—or did it help create the conditions that have made it a titan of global entertainment?
Either way, Netflix’s moment has arrived. Today it’s streaming so much video that it’s responsible for almost 32% of all traffic flowing to users’ computers on the Internet in North America. On the back of the revolution, its membership numbers have swelled past 40 million subscribers.
While other digital titans—Twitter, Facebook, even Google—fiddle with the alchemy of monetizing free services, Netflix is happily processing credit card payments from paying subscribers. Its revenues pushed past $1 billion in the third quarter of 2013. It’s already profitable in its domestic operations, and it’s rapidly pushing into new international markets. Investors are exuberant: its stock price more than tripled in 2013, going to $350 from US$95 by the end of November.
Netflix is already a global media company that film studios, television networks and the rest of the entertainment industry must do business with. Perhaps more important, it’s also becoming the one service that TV and movie fans can’t do without.
Until 2007 the company was a mail-order DVD-rental operation—a category Netflix itself defined with such scale and success, it helped take down Blockbuster. (Remember Blockbuster? In November, the faded giant announced it’s ending all rentals, and is closing its remaining stores by January.)
The company’s success in the streaming world, which now eclipses its DVD operation, is all the more remarkable given the unknowns the company had to navigate. For one thing, its business model simply didn’t exist: Netflix pioneered licensing agreements with rights-holders, such as film studios, in a shifting market where creators, distributors, media companies and technology giants like Apple and Google are all competing fiercely for a piece of the streaming action. But Netflix’s very size—and the billions it’s spending to license content each year—allow it to make offers that studios simply can’t refuse.
“They’ve probably become one of the single biggest buyers of content out there,” says Mark Mahaney, managing director at RBC Global Markets. “If you’re not selling to Netflix, the question is: Why aren’t you selling to Netflix?”
Along the way, Netflix had to reshape the Internet’s infrastructure to meet its needs. Shipping such huge quantities of bits around the world has led Netflix into an intriguing relationship with Amazon, a company with the physical infrastructure—massive, distributed data centres full of servers and routing equipment—which Netflix has augmented with new software tools to manage its collection. At the same time, Amazon is learning from its client, and mounting a serious challenge to Netflix in the form of Amazon Instant Video. The two companies find themselves entwined in a state somewhere between symbiosis and frenemy.
In some respects, Netflix arrived on the scene at just the right time. YouTube had been busy training its billions of users to “snack,” as it were, on videos on demand. At the same time, the emergence of tablet computers, just as Netflix streaming was taking off, has provided a platform that’s perfectly geared for media consumption. (It’s strange to remember three short years later, but when the iPad launched, there was a sizable body of commentary that asked what on earth people were going to do with the things.)
But Netflix’s highest-profile play has been its move into creating original content. The words “Netflix Original” have become synonymous with high-quality, exclusive entertainment.
Netflix’s reputation for hosting a vast catalogue of bargain-bin titles, was quickly offset by its first high-profile original offering: the American remake of House of Cards. The reception? Glowing reviews for a polished series that came complete with the Hollywood gloss of Kevin Spacey and David Fincher. It also earned credibility with television geeks with the resurrection of Arrested Development, a beloved cult series cancelled by Fox in 2006.
Mahaney says that Netflix originals only represent about 10% of their content outlay, so perhaps the brouhaha over this new content overstates its overall importance. But by making shows with unimpeachable pedigrees, Netflix has gained the elusive power to leave non-subscribers feeling that they’re missing out on something good.
The outlook is positive. Having colonized every corner of the household, Netflix is now talking about deals with cable companies that would see the service become an app on their set-top boxes, letting Netflix co-exist with standard cable offerings. Global licensing deals—if the company can secure them—would allow Netflix to stream content in every market worldwide and help address the frequently bemoaned disparity of its international catalogues. Such a solution would eliminate the existing grey market in virtual private networks that (to pick an entirely random example) currently let Canadian users access American Netflix content.
At this point, however, it’s in the international market (with the exception of Canada) where Netflix is struggling—and losing money. Netflix faces staggeringly high startup costs: before it earns a single cent of revenue, it first has to license enough content to compel users to sign up, and then go out and market it.
None of which has kept optimistic analysts from predicting the company could grow from today’s valuation of $21 billion to as much as $75 billion in the next seven years. A company that started off mailing out the hits of yesteryear has made itself the go-to place for tomorrow’s cultural offerings. In other words: indispensable.
A shakeup for shoppers
This was supposed to be the year Target took over Canada. It didn’t quite work out that way
High-end chains Nordstrom and Saks Fifth Avenue (now owned by the Hudson’s Bay Co.) are both headed for Canada, marking a significant expansion in the Canadian luxury retail landscape.
Shoppers Drug Mart
Loblaw got all the hype for scooping up Shoppers in July’s $12.4-billion megadeal. But Shoppers itself—faced with shrinking growth prospects and regulatory woes—did well to sell out when it did.
Shoppers Drug Mart will soon have access to Loblaw’s supply chain, which means more food, more products and more trouble for corner stores competing with the pharmacy chain.
The country’s No. 2 grocer (behind Loblaw) swallowed Canada Safeway in an all-cash $5.8- billion deal that added 213 stores to its arsenal.
The struggling department store giant slashed staff and sold back leases as it tried, and so far failed, to lift its sinking fortunes.
With sluggish sales, empty shelves and a blasé customer base, the American cheap-chic behemoth failed to live up to incredibly high expectations for its Canadian debut.