Rogers Communications Inc (RCI) 2004 Q3 法說會逐字稿

Welcome to the Rogers Communications, Inc. third-quarter 2004 results conference call. (OPERATOR INSTRUCTIONS.) I would like to remind everyone that this conference call is being recorded on Tuesday, October 26, 2004, at 10 a.m. Eastern time. I will now turn the conference over to Mr. Bruce Mann, Vice-President Investor Relations. Please go ahead sir.

Thanks a lot, operator. Good morning, everybody. We appreciate you joining us on Rogers third-quarter 2004 earnings call. As we do each quarter, we will spend the first portion talking about and taking questions on Rogers Wireless; and then the second portion focusing on Rogers Communication, ex (ph) The Wireless Company. The detailed releases for both companies were put out early this morning. If you don't have copies already, please find a copy either on our Rogers.com website, on PR Newswire, or on First Call. And importantly, if you'd review the Safe Harbor language, that applies equally to the discussion on the call this morning.

So to get started, with me here for the first part of the call is Ted Rogers; as well as Nadir Mohamed, the CEO of Rogers Wireless; along with, from his senior management team, John Gossling, Bob Berner and Rob Bruce. And also Alan Horn and a couple others from Rogers Communications are here in the room with us as well. Ted will have to leave after the first portion of the call. But Ted and Nadir wanted to make a couple introductory remarks; then we'll jump in and take your questions.

So, with that, Mr. Rogers, please go ahead.

Good morning, and thank you for joining us. I think you'd agree, we've delivered another quarter of solid growth both in terms of revenue and continued healthy subscriber acquisition and retention results, as well as tremendous results in the media company. This quarter's revenues are up 18%; operating profit was up 14%, but was held by some accounting and pension changes and also marketing cost to launch our Rogers Yahoo! Internet service. But we're very focused on that, and I think you'll see that we'll have a good fourth quarter and will remain on track to hit our numbers for the year. Overall we're competing well.

A few things stand out. First, we have a unique opportunity to acquire AT&T Wireless's 34% interest in Rogers Wireless and took advantage of it. We closed that transaction subsequent to the end of the quarter on October 13th. Obviously, we're the natural owner of the block, and I think we settled on good terms to acquire it. We sold it in August of 1999 for 13 times EBITDA and bought it back five years later for seven times EBITDA. In terms of dollars, I think we sold it for 34.50 and we paid it back at 36.37. We bought it back at that price.

Obviously, we also announce the consensual offer to acquire Microcell, another value-creating opportunity that I'm excited about, and that Nadir will comment on in a minute in merging the two GSM operators in this country so that we can better compete against the Talcos (ph). Windows of opportunity like these open only occasionally, and you can't plan the timing of when they will. But please don't be mistaken into assuming any lack of enthusiasm on Rogers' part around Canadian cable, which we like very much, and we would look very hard at opportunities that might arise to expand our exposure there within our financial capabilities.

From a more operational perspective, at the tail end of the quarter, we introduced some new cross-company bundles. We call them the "Rogers' better choice bundles." And these bundles are in direct alignment with what we've said we would focus on. First of all, our discounts, not larger ones. Second, moving the game from price to choice. Third, terms that reduce churn, such as introducing contracts for the first time for cable and Internet services. And intermeshing those with what the wireless company has done for many years. Next, remaining competitor, but not escalating in response to competitive moves.

I think that these types of packaging and pricing moves are good for Rogers, good for consumers, and good for the industry overall. It's hard if somebody is just selling a single product, but fortunately Rogers will have all of the products and in the communications package.

On a completely separate note, I just returned from a trip to Korea and Japan together with several other cable CEOs from Cable Av's (ph) executive committee, people like Brian Roberts (ph), Glen Britt (ph), Bill Scleyer, et cetera. We had several days of intense meetings with many of the leading-edge Asian vendors and service providers. It was a fantastic experience and was enlightening for all of us. Perhaps most enlightening for the group of Cable CEOs was just how pervasive wireless communications is becoming. Orders of magnitude beyond where we are in North America. This is without question a business with many years of strong growth left in it. We saw, for example, in Korea a cellular phone that was broadcasting the baseball game going on concurrently in North America at the same time. It was picked up by satellite and then streaming down by -- in the -- by the cellular company. This is what 3G will bring.

What I saw and heard confirmed for me that wireless communications will be deeply integrated with wireline communications. I'm now more convinced than ever that this is going to offer tremendous functionality for customers and tremendous opportunities for companies like Rogers.

The video side, high definition is totally the future and more and more the delivery of video will move towards switch digital. As more channels become switched, the capacity of the cable network increases almost limitlessly without the need for more rebuilds. And on-demand programming, mostly free by the cable company, is becoming a way of life on Rogers, not available on satellite. It was all tremendously exciting. And I came back even more convinced than ever that with the combination of having the broadband pipe into the home for entertainment and data and our cable business and the leading-edge wireless business with Rogers Wireless we are squarely in the sweet spots of where the world of communications going. Promoted and advertised by our exciting and well-managed and growing media business.

I'm going to stop there and turn it over to Nadir. Thank you.

Thank you, Ted and good morning, everyone. Let me quickly review a few highlights of what was a very active quarter for us. Net revenues were up 18% and offering profit was up almost 22% with solid year-over-year margin expansion. Clearly another quarter that continues our reflect our consistent focus on profitable growth. On subscriber additions in the quarter, almost 80% of our gross ads were higher-value postpaid customers; and two-thirds of which were added on three-year contract. With postpaid (indiscernible) table at 1.85%, our net postpaid loads came in at a healthy 89,000. Our top-line growth continues to be driven by quality subscriber loads and ARCO improvements We were successful in driving ARCO expansion of 6.1%, most of which was a result of continued improvement in the quality of customer mix and growth in wireless data, roaming and optional services. Importantly, wireless data contributed 5.7% of our network revenue in the quarter.

On the operating expense side, this quarter we chose to invest in some key targeted customer attention initiatives that I truly believe will pay healthy dividends as we go forward. Our operating margin, profit margin, in the quarter was 42%, the highest level in more than five years. Net net with CapEx down 14% year-over-year, we delivered almost 130 million of free cash flow this quarter before working capital changes.

From a more strategic corporate perspective, we had two key developments this quarter that Ted mentioned. The first was RCI's agreement to acquire the 34% stake in Rogers Wireless that was owned by AT&T Wireless. This transaction closed on October 13th and demonstrates a strong endorsement of RCI's commitment to wireless. From the day-to-day wireless operating perspective, it's important to note that this change in ownership in no way impacts our extensive North American roaming capabilities. Together with Cingular our customers will continue to enjoy the benefits of seamless roaming on North America's largest combined GSM/GPRS network. Secondly, on September 20th we announced our agreement to acquire Microcell. This acquisition will enable us to deliver significant shareholder value through increased scale, a superior spectrum portfolio and leveraging the fil le (ph) grand. While I know many of you are interested in more of the specifics around our integration plans in terms of synergies, price plans, et cetera, we're going to wait until the deal is closed before we share any of our operating assumptions.

In closing, we remain committed to profitable growth; and we're excited by the opportunity that the acquisition of Microcell provides us. With that, I'll turn it back to Bruce for your questions.

Thanks, Nadir and Ted. Operator, in just a moment -- couple seconds actually, we'll take questions on the Wireless section. But I wanted to point out for folks that haven't been on our calls before, weren't on at the beginning of this one, that we'll cover the Cable Media and Rogers Communications from a corporate perspective on the second portion of the call. However, as Ted Rogers can only be with us for a few more minutes, if you have any questions directly of him that wouldn't be related to Wireless, this would be the time for that as well.

I guess, lastly, we'd ask that you respect our request that anyone that asks questions, if you could limit them to a particular topic so that as many people as possible have a chance to participate; with that we'll begin to take questions.

Simon Flannery.

Wanted to follow up on the data RPOO (ph) and give us some more parameters around what percentage of your customers are now taking and what their average RPOO is, and what do you think your potential is over the next couple of years to drive that further and continue to drive the RPOO higher?

Simon, it's Nadir, and I'll kick off and then Rob might want to add some specifics. But as I said, this quarter was again really strong on data, 5.7% off our revenues. And our net worth revenue comes from date about a 90% increase quarter over last year's same quarter. And we've been trending about 100% so doubling literally every quarter over the year, same quarter the year before. And in terms of going forward, you know, we've been talking about the growth projectory for quite a while and getting more and more comfortable that if anything our assumption of 10% revenues coming from data in '06 is probably conservative given where we've got to already in this quarter. And if you look at the portfolio of data services, very balanced, strong on the business side with Blackberry's clearly being the growth engine on the business side but increasing, and now other products that Rob can refer to on the consumer side. SMS is really the key driver, but some other services like our navigate portal is also picking up. Rob.

Yes. Just to elaborate a little further. We think it's a very healthy portfolio, as Nadir said, about 50% of our revenues are from business, about 50% from consumer. On the business side, Blackberry continues to be very strong for us in spite of the entry of two other competitors into that space. Very proud of our recent launch of the new 7100 device, otherwise known as the Charm." It's seen incredible success in the U.S. Again, that will be exclusive to us, and it will fill an all-important void in the device portfolio for customers that are slightly more voice than data centered; so we're excite about that. Simultaneously almost, we launched a new device called the 7290, which is a quad-mode device, which will be targeted at the high-end business traveler who does a lot of international roaming. So we expect to see continued strong growth in the Blackberry portfolio. As well the other devices, we see a very nice lineup. GSM/GPRS gives us access to more devices sooner than anyone else gets them. We see in the road maps going forward that's going to continue and put us in a very good space. Coming to the vertical part of the market, it's a growing part of the market; we're making great progress there and we continue to rack up wins. Looking at consumer, as Nadir said, SMS is the largest followed by Wireless Internet. They're getting very close to being the same size now. Penetrations on both services in excess of 25% and growing. And back to your initial question about RPOO, Simon, both $3.75 now in RPOO from data.

It's Ted here. Not to overanswer the question; but from a 35,000-foot level, what we're seeing sort strategically is the cable business was all video and the wireless business was all voice. And what's happened as you know in cable is the data has become a very significant part of the mix, and it's revolutionized the cable company. It's revitalized it, financially and operationally. It's made it a different type of company in the consumers' eyes. It's protected the video part of the business from competition because the data is growing so fast and will continue. Now in the wireless where we were 100% voice revenue and were -- as you go along through the years you'll see more and more competition on voice and so on -- the introduction of data there, also in my opinion, will change the economics of the business for the better and will mean a significant growth uptick just as we've seen in the cable.

John Henderson. I have a couple of questions on the sort of funding arrangements.

I know you haven't made final decisions yet, but I wonder if you could help go through the options, funding options for the $1.7 billion (ph) stake advantages and disadvantage.

John, why don't I get Alan to speak to that.

John, clearly, currently the 1.75 billion is funded through a bridge facility at RCI. And as we indicate in the press release, we are looking at a way in which that facility or that funding for that (indiscernible) can be some move to the wireless company. And there are a number of challenges that are being sort of viewed currently in that regard. But as we point out in the press release, none of these have been finalized yet; and so no proposal on that has been presented to the wireless board. But there are some ways in terms of distributions, you know, two shareholders, a substantial issue of bids, (indiscernible). A lot of, you know, these items are tied up with (indiscernible) the provisions of the minority shareholders' rights agreement within the wireless companies; so we have to walk our way through those things. But the overall intention currently from an offsite perspective is that this funding, you know, of the debt would be moved on to the wireless company

If the shares were transferred to RCM, would it be done at the same price?

Just to say, no proposal has actually been (multiple speakers) --

Fair enough.

And also any transactions involving the wireless shares have to be governed by the shareholders, say, the manner (indiscernible.)

I'll try one more. I probably won't get an answer on either. Why keep RCM public at this stage?

Why not?

I would say there's a fairly sizable discount in RCI that exists because of it being public. And I would think there are funds flow issues that are easier addressed if it were all part of the same family.

It's a great dream and it looks pretty overpriced to me to take private, but we haven't made up our mind on any of these things. We have to concentrate on today. We are fighting very hard to persuade the competition bureau to not disallow this transaction, and that's entirely what we're concentrated on at this time.

Fair enough. Thanks very much.

Richard Talbot from RBC Capital Markets.

Question is for Nadir. It has to do with, Nadir, the cost of the customer retention and the upgrade of the color phones. Firstly, a data question. If you could just give us a sense of how many people, what percentage of your base is currently upgraded to a higher-end phone? And secondly, from a bigger picture perspective, in light of consolidating environment, I wondered why you were so aggressive in terms of trying to sign customers up on what would appear to be a fairly expensive three-year contract.

Richard, I'm trying to address the subpoints. Just starting at the highest level in terms of the customer mix. We've been pretty successful in moving to GSM almost all our loads; frankly, just about 100% are now on the 850 GSM network when we get them in. In terms of the base customers, 2/3 of our postpaid base is already on GSM, most of which are on 850. So we've been pretty successful. What we did this quarter is important. Strategically, we think the best thing we can do is really invest in improving our customer experience. We've made a commitment; we're not going to sacrifice quality, whether it's on the network side in terms of capital or on the operating side.

So one of the things that we continue to look for is opportunities where we can actually improve a customer's experience. This particular quarter -- and I'll get Rob to speak to it -- we had a couple of initiatives to actually target subsegments of customers to upgrade them on the latest devices. To your question around three-year contracts versus two-year contracts, from an investment perspective, this quarter obviously we saw a significant percentage of our loads coming in on three-year contracts. I think what it does is allow us to build relationship with customer over time; so that, frankly, you know by the time we hit LMP, they're convinced this is the best company to stay with. And what we've always found in the industry is, when a contract expires, it's a catalyst for a customer to change. It may not be a case that they're not happy or happy; it's just becomes an opportunity to say, why don't I look around? And I think extending from two to three years obviously helps us on that front. In terms of the specific dollars that we invested, I'd say roughly speaking 4 million or so -- and John can correct me -- would be the amount that we invested to move to that three-year contract in the quarter. So we think it's clearly an investment that makes a lot of sense.

Richard, the interesting thing is we had a couple of initiatives this quarter where we made a choice. You know, we made a choice to say let's invest now even though to a certain extent it hits you on EBITDA, the important thing is down the line we'll see benefits in terms of churn. And I think that's the kind of trade-off that hopefully we continue to make.

Just a follow-up, Richard. What Nadir is referring to is we made a very targeted offer to a subset of our customer base on PDMA; largely, they would be very high RPOO and higher predicted risk churn customers. We offered them something we call the "President's offer," which was an offer to get upgraded to one of three great new handsets at a terrific price; and we moved over a very significant number of customers during the quarter and felt that it was something that's critically important to continue to do to build the long-term of the business as Nadir said.

Just to follow up on that, Rob. We would expect to see a similar extension of the President's offers then into Q4 and early '05 then; would that be fair?

Yeah. I think the way we look at it is we kind of go at these things as they make sense financially. I can't say specifically whether it will be the President's offer, but we'll continue to take the opportunity to move customers and upgrade them as the financial case makes sense to do it.

John Grandy from Orion Securities.

I have a question for Mr. Rogers. At the time CRTC hearings on IP telephony a few weeks ago, quite a few interveners suggested that the cable industry should be subject to restrictions on bundling of services and potentially should even have to tariff your telephony service offering. The idea being that if that did not happen then no other competitors would be able to enter the market because of your strength. I wonder if you'd like to comment on that; and in particular, at what point does it become less attractive for you to consider the investment in telephony if you don't get the results from the CRTC that you were hoping for?

Well, (indiscernible) may want to add to this. First of all, anybody reading the newspapers in the past number of months would see that there are a tremendous number of competitors for local telephony already; and so I can't imagine why -- they know that the cable companies are coming in. Some of them are international companies and well funded. I can't imagine that it will have any affect on them, number one. Number two, you must remember that the basic -- I always like to go up to 35,000 feet and understand what the logic is behind the rules. The logic is that if somebody is a dominant carrier, somebody has 98% of the market or has 75% of the market like we have in cable, then the government, if they wish to foster competition, says you cannot -- you cannot change. We could -- we were rate regulated, for example, until there was a sufficient number of video cable customers held by competitors to us. And only after we could prove that were we reregulated. And the same will apply, I'm sure, to the telephony market. They have 98% of the market. If we start a service in woodstock in London and Kitchner (ph) they lower their rates just in those three markets but not elsewhere, then that is anticompetitive. They have 98% of the market, so they are the dominant provider and they would be rate regulated. They were not rate regulated in video when we were. And we will not be rate regulated in telephony where they will be as long as they are the dominant carrier. And we are moving forward on telephony come up with a innovative product bundle as against a price bundle and we're working very aggressively on that.

When we look at the actual amount that you've spent on telephony so far this year, it appears to be well below your guidance. So we shouldn't interpret that as being any lack of confidence in your part? It's simply just timing issues?

Well, I think it's timing, but I also think we're finding the costs are lower than we'd anticipated in a number of cases. And part of the costs that we have is that we have upgraded, for example, the powering on the cable network from, Edward, I think, it's two hours to four hours and that's being charged to the telephony project. Would we have done that anyway because of the growing importance of the data business? I think the answer is yes. But so we're making sure the plant is hardened and the service is made noninterruptable as much as we can.

Peter Ramey from (indiscernible).

Another question for the team there and perhaps Mr. Rogers is -- and Mr. Rogers, you mentioned that you were totally focused on convincing the competition bureau that there were no -- shouldn't be no concerns with regards to this proposed acquisition. I'm just wondering are you still in a dialogue with the competition bureau? Are we all just waiting to hear back from them on their final decision at this point? I'd just like to get some flavor for that. Thank you.

We're still in a dialogue with them. And it certainly is not a certainty when you deal with a regulator. You most assume that you're coming from behind and use every ounce of your energy you can to persuade them. It would be hard, I think, for somebody to think that Rogers who historically has battled Bell for decades and Bell has battled Rogers. It would be hard for you to comprehend that it would not be an improvement in competition by bringing together the two GSM operators, who, if left separately would be more vulnerable to Bell and to but Tellus (ph). But it's our job to persuade the competition bureau so that they do not disapprove it, and we are working as hard as we possibly can taking nothing for granted.

Any sense of timing on their final decision?

No. That's up to them.

Glen Campbell from Merrill Lynch.

Another good quarter on wireless in terms of postpaid RPOO. I wonder if you could give us a bit of a sense as to what the trends on postpaid RPOO are as between consumers and business customers.

Yeah, Glen, obviously making great strides in terms of RPOO. And RPOO to me is a function of a few things. Pricing stability is one of them; second, would be growth and new services. We talked a little bit about data -- I'll come back to that -- and the third would be getting deeper into penetrations, which we clearly are as we go forward. And let me kind of go at each one separately. You know, one of the things that we found that has worked for us and been a strong contributor to loads is our family plan. That's where we see the biggest pocket of the new customers joining the category; and so far, frankly, are very pleased with the RPOO and the lifetime value, if you will, with family plan customers, who tend to have better churn for as well. That's helping hold up the RPOO because you would normally think that that's a natural reason for the RPOO going down. On the service side -- I already talked to data at length -- continues to growth. But beyond date, roaming has been very strong for us, as is optional features like voice mail, call display and so on. I think both categories have been contributing about 30% growth year-over-year, so that's strong. And then on the pricing front, relatively stable. No question that City Fido, as it grows, continues to have an impact. It's hard to say what exactly because we haven't heard the numbers from the other guys, so can't give you a read on the market. But anybody that certainly living in Toronto would know that there's been a significant marketing push on the City Fido, every billboard, commercials and so on. From a price thing, it hasn't stabled but, things, you know, like City Fido, initiatives at Bell (ph) particularly on bundling whether it be the 5 (ph) LD program or some of the more recent pricing actions from Bell, those always are risks that we factor in. But given stability and the other factors over time, it would be great to actually see a post-paid RPOOs at least stay stable. In the short term, we've certainly been more than stable.

Would it be fair to say though that business RPOO has probably been stronger in terms of year-over-year growth than consumer?

Glen, the probably the best way to look at it is on the business side our focus really has been on the data side, because if you think of corporate customers and business, a lot of voice side, has had earlier penetration. What we're now seeing really help on the RPOO of business customers is the adoption of data and data services. Not just Blackberry, but e-mail and messaging is a big driver.

We have time for one more question. Greg McDonald from National Bank Financials.

Ted, I have a quick question for you on a more strategy level. You commented on the importance of on-demand services in our opening remarks and I tend to agree. This is probably your biggest competitive advantage on cable right now. Given what you saw in Japan and given some of the trends we're seeing in the U.S., I'll note Comcast in particular, we've seen a lot more content onto the server to take advantage of the on-demand service. Is this something that you -- is this a strategy you agree with; and if so, how much more opportunity are we looking at for Rogers to really push that type of strategy? Are there hurdles with content at all? What's the outlook there?

First of all I don't pretend to know all the details. Tony Binder (ph) in our media group and David Purdy (ph) in Edward's group is our people who have the expertise. But what I believe passionately and after talking to Brian all the way over on plane to Japan is that it's a way of life. And people -- we are moving to an era where people want to receive and get any programming in any location at a time of their choosing. And that's the ultimate vision. And that's why the phone business, the wireless business and the cable business sort of start to meet and make sense. Video on demand is an important part; PVRs are on important part of this. So I believe that we can improve tremendously the opportunity for our customers in cable and new customers in cable, because we have got a million two hundred thousand home that's we pass in cable, Edward, that were not cable subscribers; so there's a tremendous opportunity here. And we take our television station, our small multi-cultural television stations in Toronto, and they have, I think it's 30 different languages that we broadcast. So you might have a certain language that's broadcast Tuesdays between 3:00 and 3:30. And unless you're there Tuesday 3:00 to 3:30 or wealthy enough to have a PVR you miss the programming. So by putting that programming onto the on-demand, you can watch it at any time along with commercials; and this greatly expands the opportunity for the broadcaster and greatly expands the opportunity for the viewer. This is the future.

Just as a quick follow on. Is there a concerted effort to look at putting other local contents, you know, dealing with the broadcasters, I guess.

Yes. I think the cable company, for example, does the Ontario hockey broadcasts, and those could be put on. We have the biography channel, for example; and it's an obvious opportunity. Every time we renew a contract with a program supplier on cable, Brian, for example, is sitting down with them, or his people, and saying, look, fine, we'll renew with you, but we want some on-demand programming that we can give to our customers at no charge. Now, we may have to pay for that programming on demand, some small amounts from time to time; but it so enhances the service for our customers, all of which cannot be duplicated by the satellite. I think you will find satellites in our country, because we don't have a Rupert Murdoch among the owners of the two satellite companies, I think you will find them peaking, and I think the phone companies know that and that's why they're contemplating putting fiber and other things in at perhaps $1,200 Canadian a house in order to try and protect themselves. Of course $1,200 is hard to justify with the additional revenue that they might or might not get.

Just to wrap up. Are we going to hear about any new deals from the near term?

Not from me.

Subscription, video on demand, or other on-demand services?

That's just a way a life that Edward and his people, David Purdy and others and Tony will do. You'll hear dozens of them, I hope, between now and Christmas. That's just a way of life.

Well, operator, what we're going to do is we're going to go on mute for just a few second and shift a couple of folks around in the room; and then we'll start the second portion of the call, so bear with us for just a couple of seconds here.

We're ready to go back on. All right. So everybody will focus the second portion of the call on Rogers Communications excluding wireless which we just covered. So with that, with me here today, in addition to Alan, are Edward Rogers, the CEO of Rogers Cable, along with Don Huff, Mike Adams and Mike Lee of Rogers Cable senior management team, and also Tony Viner and Laura Nixon from Rogers Media. A couple of other RCI folks are here with us as well. So with that we're ready to take questions for the second portion of the call regarding our cable, media or corporate operations.

Jeffrey Fan from UBS Securities.

Questions on the cable side regarding your sales and marketing costs. It's up tremendously from last year. Just want to get a little bit more details on the costs around some of the marketing campaigns this quarter and perhaps year-to-date as well. And also particularly on the Rogers Yahoo! launch, and looking forward going into next year whether these spends (ph) will still be around.

Thank you for the question. There's kind of a couple of things we're trying to do on the sales and marketing side. One is we're launching very exciting and very competitive new products and services, such as the Rogers Yahoo! launch in July, such as the TMNS/VOD launch, SVOD only available on cable, and continued expansion of VOD across the Ontario marketplace. The digitization of our service. So if you're a digital customer, every channel will now be in digital, which is a very competitive issue in our business. While we launched 5 meg Internet late in May, we still had some costs associated with launching and getting that product up and running in June and July. But so there's kind of that element to it. There's trying to build new distribution coming much more competitive and effective on the retail side, which is important in our business, especially the cable side; and then just some general competitive activity. But I think when you look at the going forward, it will still continue to be a very competitive market that we will need to compete in; and I think you'll see, you know, strong, you know, some sales and marketing costs associated with that. But you won't see the growth that you've seen, and I think that we're at an ample level to compete as we go forward.

Can you give some dollar amounts like in terms of all these campaigns you mentioned, what they'll all costs this year?

I mean just competitively we tend not to talk about what we spent on our campaign basis.

Okay. So the sales and marketing costs, you're saying, increasing going into next year, will be a lot lower than what we've seen so far this year?

I'd say fairly minimal, yes.

Okay. And this second question, may be Alan can touch on this. On the question regarding your financing options on the bridge, one of the things you mentioned was the distribution to shareholders. Can you just maybe discuss on that particular step the leakage to minority shareholder if were you to make a distribution and how that factors into your financing options?

Sure. This day -- I'll try to answer this one as opposed to last time. You know, when you say "leakage," I mean, any distribution that goes to the minority shareholders obviously it's our return to those shareholders that they're obviously entitled to as much as RCI is. I think that the point on this, however, is that, you know, we're still aren't at a stage of making final decisions in terms of how these transactions will be affected. There are other -- obviously other thing that's are floating around, the whole issue with Microcell and the financing of that transaction if it proceeds is a factor in it as well. And I think currently, at this stage, we're just reviewing the various matters. But it's clear -- and as I said before that the all -- any of the dealings with shareholders on a -- will be governed by the minority shareholder's rights plan; and obviously, if there's any distribution to shareholders, the distribution will be made equally, and the 10% shareholders will be entitled to anything that the 90% shareholder's entitled to.

So I guess the bottom line is you will be able to live with that distribution to the minority shareholder, since you mentioned --

It's not something that I think we live with. It's the right that minority shareholders have. If that is a route that we proceed with, that's just a consequence of it.

Jeff, it's Bruce Mann. Let me maybe just add to your first question, come at it another way. The quantum of the year-over-year increase in the marketing costs are obviously laid out in the MD&A and the cable section. But there's some other adjustments we talk about as well, adjustments as much as items that impacted operating profit from an other than purely operating perspective, including the adoption of stock options, expensing, some changes in our pension expenses, and some cable telephony launch costs that we weren't capitalizing yet at that point in the quarter. And the quantum of those items would have moved the core cable EBITDA growth from, like, 2.7% to more than doubled, to around 6.5%. And then any of the changes, the additions to the marketing spend, would have been above that.

Divi Gosh (ph) from CIBC World Markets.

Question on the cable EBITDA again and if I may. Edward, you talked about the marketing associated with the Yahoo! as well as the digital refocused not being recurring items going forward, but clearly telephony will be in 2005. So my question really is whether margins have really maxxed out this year for the cable asset. And I note, even to make the lower end of your cable EBITDA guidance of 7-10 (ph) million for this year, you now require 11% sequential growth in cable EBITDA, which seems to be quite unrealistic. I was wondering if you could kind of comment about those points.

We are maintaining our guidance for 2004 while it will be on the lower end. So I think you'll see some of the timing related of this some of these activities that would, you know, mean less spending in the marketing and sales in the fourth quarter. But I think when you look at some of the financial things that have hit us, and Bruce walked you through those, some of the timings on the sales and marketing side, it has had an impact; but we're clearly focused on continuing to do better, and we have maintained our guidance for the year, and we're going to maintain the cost we have and not look for future growth on the marketing and sales costs as we go forward.

I guess just to clarify, Edward. You know, at the moment you've been spending marketing dollars on enhancing existing products like your Internet product with Yahoo! and your digital product. In 2005 you're marketing a whole new product which, at least intuitively, would suggest much greater marketing expense in enhancing existing products; would you say that's true?

I'd say that's fair. I think when you look at the businesses and you layer on telephony, there'll definitely be some incremental start-up costs associated with that business. So if you're looking at it on a comparable basis year-over-year to the business we have today, that's, I guess, more what I was talking about; but, yes, there will be some costs associated with the telephony launch.

Jason Bazinet from JP Morgan.

I was just wondering if I could ask maybe a longer term question. Given that you guys are rolling out voice over IP, and we're also hearing some of the wireless operators talk about putting voice over IP Y-5 (ph) chip sets in their mobile devices, I was wondering if you could just talk about what advantage, if any, you see longer term from that convergence; and when if at all you'll begin to roll out those mobile devices to kind of leverage your cable platform?

Thanks I'll start and then maybe have Mike Lee add anything that I've missed. But definitely we're in both lines of businesses. When we looked at our options for local telephony, we looked at options from a wireless perspective, a wire perspective, and kind of a marriage of the two. And what we came on as a deployment of the standard cable, package cable telephony, and then look to the future how we can layer on wireless as in accentuated product to customers. And that will appeal to some customers and won't appeal to others, and we'd like to be a company that offers customers a solution for voice; and if it's a stand-alone voice product in the home or a phone they'd rather carry on a full-time basis, which a lot of customers are choosing to do today with their cell phones, or a combination of two, we'd look for that. I think the timing of the combination of the two is beyond the launch of our product. And Mike, I don't know if you have any more flavor on that.

I'd just add to that, as Ted was saying, it appears to be clearly sort of this -- I hate to use the word "convergence" -- but convergence in terms of what's going on in the mobile space as well as what's going on in the wire-lines space. So I think actually the opportunity for us to work with the wireless (indiscernible) voice is actually quite exciting, in the sense that we get to take advantage of some of the back and infrastructures they've already made the investment in to help us with our entrance into the wire-line business. But also with respect to this combined opportunity with a wireless offering for customers, I think we get two benefits primarily. One is that a lot of the capacity that is required for the wireless company to fill out the necessary infrastructure to deliver more minutes into a residential environment, we can actually offload that onto the cable plan for back (indiscernible). That's very, because that's on a (indiscernible). The second thing is that we get the opportunity to provide a combined offer for our customers and so that they get to take advantage of the best of their wire-line services and the best of the wireless services in one offering for one customer. So that means that as we go forward, if a customer is more predisposed to being wire-line centric for their telephone service, we can enter it in from the cable side and add to them an option for wireless. And if it happened to be wireless, I'm sure I could -- that probably swings a little bit younger, then we can offer them a wireless offering, and then as a back end provide them with wire-line extensions for that. So I think it's a win for us as an organization and also is a win for the customer. And as we're working through the standards activity, this looks very good. But I would agree with Edward that it probably looks like it's a follow-on activity to our current wire-line telephony effort.

If I could just bore down on that second advantage you talked about. Do you see the primary advantage coming -- I mean the second one, meaning not the cost of the back haul, but more in terms of the advantage from the customer perspective. Do you see that manifesting itself in things like number portability or is it better coverage quality within the home? What would be the practical sub-elements that would be advantageous from the customer's standpoint of having it integrated?

I think for a customer, the customer I think expects that if you're offering a service that it performs properly. So I don't think they're looking at -- they're not thinking about it in any way other than they'd like to have, you know, their wireless service working properly in the home; and how we decide to facilitate that is up to us. I think it's really more a back-end issue from a customer perspective. But I do that the ability for that customer to carry some of the elements of both sides of the service with them in one handset is attractive overall as things become increasingly more complex.

Glen Campbell from Merrill Lynch.

I mean your $5 wire-line long distance offer looks like a pretty smart way to feed the market for voiceover IP. But I wonder if you could tell me -- I mean if I'm the customer who takes that offer today and your voice isn't intended to be discounted heavily against Bell's service what's going to persuade me to switch from Bell local and Rogers long distance onto Rogers' voiceover IP.

I'll just start by saying to your point and the reason we're doing it is to match Bell in our bundles. It's a product where we're not going to be losing money today, and it seeds a market (indiscernible) local customers into as we launch in '05. The pricing that we have for our multi-product customers which we rolled out a little bit over a week ago, we kind of back in the telephony pricing to fit into that so it makes sense. And the long distance would be a part of that. We had some assumptions on LD in our original business case and targets, and it wasn't necessarily a big source of revenue for our original business case. But, I mean, if a customer was a $5 LD customer and we migrated them to being a full telephony customer, the package would make sense.

Okay. Just to follow up. As I look at the third-quarter numbers, I mean, the cable ads were a little soft perhaps because of heavy competitive activity, which I would expect would be reversed given your new offer going forward. Can you give us any sense of how much impact the Bell offer had on your basic cable subs in the third quarter?

Well, we have definitely we try to track competitive activity as best we can. We try not to disclose all of that. But Bell is obviously a competent competitor that has been in the market for about five years. With Bell Expression now kind of more so with their DSL offer. But I'd say if you look at the third quarter, we did put through a rate increase, at average about a buck and a quarter per customer, which probably had some effect. When we usually put the rate increases, that tends to be. We've intend to focusing, I'd say, on a bit higher quality basic-only customers; and when we've gone into the noncable, we've concentrated more on cable-only customers, and they tend to spin a bit more. We've put in the third-quarter a lot of win-back offers in -- especially against satellite where we did very well. And so while our basics year-over-year, if you were to compare, the number's down a bit. When you look at the third quarter, the last few years for Rogers Cable, it's pretty well in line. When we look at our -- as evidence in the terms of the quality of customer, that tiers were about 4.5 thousand better quarter-over-quarter, customers (indiscernible) take all the tiers was about 12,000 better third quarter over third quarter. And so we're trying to get customers that take more products. Digital was a big part of that. And I'm confident, when I look at the numbers, we're going to easily make our guidance on basic for 2004. When you look at Bell's media (ph) satellite, say, as I say they're a competent competitor, but they do have some limitations on their product today, in terms of VOD, in terms of having a PVR option or high-def option. We had about a million -- just to add some color, we had about a million MDU customers today and about 700,000 of those are tenant pay and about 300,000 are condo. Bell has been tending to focus on the condo market where they feel they can get in maybe a bit easier. And for us, of the 300,000, about 150,000 are locked up on seven-year bulk terms. So they've got some competitive areas in the 150,000, but we're competing well against them there as well.

Maybe just as a clarify quickly on that. When we look across our MDU serving area, there's about a million suites; obviously, we don't have a 100% penetration across all of that.

Right.

Ben Swinburne from Morgan Stanley.

If I could just come back to the Rogers Yahoo! deal and the upfront investment you're making on the marketing side. Question for Edward and Mike. When you look at this deal in its entirety, it obviously has strategic benefits. But from an income statement perspective, clearly you've spent a significant amount more this quarter than in 2Q, and you must believe this is an investment well spent. Is the payoff from the Yahoo! deal really something that's [going to manifest itself boardly in terms of market share RPOO current levels and eventually margin, or are there specific metrics (ph) we should be watching over the next, call it the next two to four quarters that you really think will be driven out of this deal and the investment you made up front.] (Technical difficulties.)

Why don't I start and then let Mike answer. I'd say it's obviously, you're looking at, you know, less than a quarter in in terms of if it's working or not. But I'd clearly -- I'd definitely say it is working. We've got the best partner in the Internet. And what we're launch is a new product and a new reason to use the Internet for customers, a sweeter products that allow our customers to get value. I mean, we've historically sold access, I'll call it; and we're trying to sell a solution for customers. It comes with a product where it's a safer, better Internet in terms of less, you know, better antispam, antipop-up block or virus protection parental control and trying to sell a suite of new services, like music and pictures and gaming and so much more. So it's going to be longer term to say how does that strategy work for us? But I think as you look and you get into the deeper penetrated Internet base, customers want to know it's access and it's fast; but they also want to know what they're going to do with it and why they should be using it, and that's where I think you're going to see this partnership help us in the future.

Ben, it's Mike here. I would say that the focus is a longer term focus with respect to the benefits of the partnership. And it extends into many different areas. I think on a base level, clearly, we believe that with Yahoo! as a partner we have our opportunity for market-share perspective is greatly increased. Second thing is, the product we offer with Yahoo! is born from a lot of research, and it hits on those things which are most important for our high-speed subscribers, so whether that be security, music, gaming, those things that really are driving sort or broadband growth and broadband usage. In addition to that hopefully that will result in better customer stats. And as well, with the kind of complex product offering that it is in terms of its richness, there's a significant amount of requirement for investment by the consumer to use the product, and that investment is sort of a cost that they'll bear and it will increase the overall bearer for parts of it, for bearer to switch overall. Third thing is, is that -- and the last thing I'll focus on is that the (indiscernible) business is constantly in flux and change, and we're seeing more and more services, whether that be antispam tools or antivirus tools; and so I do think over the long term is it will definitely assist us in margin improvement because all of those costs are incremental to the costs of our current assets, and with the interest that we have right now we -- this protects us over the long term with regards to the impact of this cost.

Rob Goff from Haywood Securities.

My question will be for Michael. With the R-box (ph) spending a lot more time discussing their own network evolution, could you give your own competitive assessment of where you see Bell going, where you see your network going, and what sort of consumer demand you foresee in what you're building for?

Sure. I think there's a fundamental difference between the way we approach the slate of services. And it is in the fact that when Bell goes to build out their capacity (ph) for the network, whether that be based on Adiacell 2 (ph) or Vediacell or Vediacell 2 (ph), they are creating sufficient band widths to be able to deliver all the services within the context of the capacity they're creating. So when they talk about 20 megabits per second or 15 (ph) megaseconds or currently 3 megabits per second or 8, that is to deliver not only to the data portion of that offering, but also all the video services inclusive of HDTV. So you have to split that and allocate that capacity. And the challenge is always with video, while data can be thirsty, video is constant. So if you're going to deliver even with advanced (indiscernible), you know, high definition TV, it's 8 megabits per second when it's on. So you don't have the luxury of, you know, sort of sharing it with the data product. You have to dedicate that amount; so that in the event someone turns on a TV, they get video.

Cable's perspective, if you take a look at the road map, when we talk about DOS's (ph) 1.01.1, 2.0,3.0, that is a data specific road map for a spectrum that would be -- spectrum at capacity allocated directly just to the data product. So if you take a look at the road map where we go, that's three elements that you should focus on, is in DOS's 1.01, there would be a (indiscernible) service element for the guaranteed (indiscernible) customer. DOS's 2.0, which brings us to a point where we have increased capacity and symmetry, and then 3.0, which is on the road map now and being developed, which is sufficiently -- a significant increase in capacity on the network, more than enough to be able to deal with some of the speeds that you're seeing around the world. Ted was saying we just came back from Japan, and they're seeing significant and greater speeds. We have the luxury that we already are a network that's optimized to deliver high-definition broadcast video services, which are the hardest of all services to deliver. So we don't have this factor (ph) challenge with respect to where does high-def go and where do we sit with data because of they're two separate and independent networks of how we deliver services. So I think we measured up quite well from a factor (ph) perspective. I think if you take a look at no matter what the plan is, DSL continues to have a challenge in delivering all of these (indiscernible) services of high-def; and we hope to see significantly more innovation in high-def, as well as some of the advanced services like on-demand and even on-demand high-def going forward.

And as a new term benchmark, previously you've told us the percentage of digital boxes that's were HD compatible.

So in the last quarter, the last quarter the number -- our first-quarter number was about 10%; our second-quarter number was about 20% of net ads, and that number is holding fairly constant actually going into the third quarter; and fourth quarter tends to be a big TV quarter, with about two new (ph) TV purchase which tends to have a nice hockey stick effect. And that's consistent with what we're seeing from the TV manufacturers as we talk about with them. So high-def is definitely picking up in interest by consumers from a -- as they purchase televisions, as well as numbers of hours of programming that are available on high-def now is increasing basically on a quarter-over -quarter basis.

And I'll just quickly add to that, that that's only ramping up; and while these boxes are a bit more expensive, the customers that use them, there's been benefit in churn, and especially on the PVR side. And so I think that advantage especially against DSL on high-def and PVRs, it's only going to be a more growing part of the business as we move into the future.

Tim Casey from BMO Nesbitt Burns.

Question on the cable side. Could you talk about, perhaps give us some indication on what percentage of your new ads or your installed base have PVRs; and then talk about what you're seeing on the subscription video on demand. I know you've only been in markets for a short while with that product, but I'm curious as to what you're seeing as far as pickup and any comments you would have on what that implies for churn and RPOO and network costs. I'll just begin.

I think Mike had answered in terms of the net ads for the third quarter. And I'd say today just over 5% of our base of boxes out in the field are one of the higher end boxes, high-def, Tevia (ph) or high-def PVR. And as I mentioned, we're continuing to see a strong growth in that as we move into I'd say pretty well quarter over quarter.

Mike, you want to take this (indiscernible)?

Sure. With regards to the SPOD (ph) question, we launched TMNS/VOD as basically an add-on feature for the existing (indiscernible) subscriber, so everybody's got access to it. I would say at this point, it's still too early to tell with regards to impact on churn, and specifically sales increase directly associated with SPOD. We have some I would call it more anecdotal at this point, and some preliminary information, but I wouldn't say that it's necessarily direct proof. What I can tell you at this point is in the earliest days (technical difficulties) or satisfaction that we're seeing well in excess of the majority of the customers [using the service (technical difficulties)] taking advantage of it as a feature; and generally, we'll use that as if you have continued repeat usage that this is something that you value as part of the overall offering, and that that generally is a [leading indicator (technical difficulties)] for increased customer satisfaction and as a result lower churn.

Operator, thank you very much for conducting the call. But more importantly we wanted to thank everybody for participating today. And we appreciate your ownership and your coverage. If you joined the call late there's a rebroadcast that's already loaded on the Rogers.com website in the Investor Relations section. With that, we hope everyone enjoys the rest of their day; and this concludes or call for this quarter.