Juri Koor is a turnaround guy. Give him an ailing company and the Estonian-born industrial engineer who came to Canada with his family when he was 12, will either fix it, sell it or close it down. So when he became president of Call-Net Enterprises Inc., a small, relatively unknown telecommunications company in 1991, he expected it would take maybe nine months to put things in order and move on. There was little doubt that the company was in trouble. Formed in 1986 to compete against Canada’s entrenched regional monopolies, Toronto-based Call-Net was on the verge of bankruptcy when Koor took charge. “We had days when we didn’t have money for Xerox paper and the coffee guy wouldn’t bring coffee–it was all COD.”
It has been some turnaround. Koor, 57, is still there, one of the best-paid executives in Canada, with a 1997 compensation package worth $12 million. And little Call-Net Enterprises, the parent company of Sprint Canada, has just begun absorbing another long-distance company, Fonorola Inc. of Montreal. That hard-fought, $1.8-billion deal makes the combined company the main challenger to the old-line phone companies grouped together under the Stentor alliance, such as Bell Canada, Alberta’s Telus Corp. and B.C. Tel.
By many measures, Sprint now has the scale it takes to compete and become the full-service telecommunications company that Koor wants it to be. Combined revenues last year were $1.3 billion. Estimates from the Yankee Group in Canada, a Brockville, Ont., telecommunications consultancy, put Sprint and Fonorola’s share of the long-distance voice market this year at about 20 per cent. That is well ahead of AT&T Canada Long Distance Services, and bigger even than any of the Stentor companies except for Bell. Sprint’s strength was serving residential customers and smaller business while Fonorola targeted large companies. Fonorola is building a North American network of high-capacity fibre-optic cable that will allow Sprint to replace leased lines with its own and give it access to the biggest U.S. markets. “It makes Call-Net a more well-rounded company,” says Toronto telecommunications analyst Michael Sone, president of NBI/Michael Sone Associates.
Koor’s task now is to manage the integration, overcome the bad blood occasioned by a hostile takeover, all the while continuing to do battle with the giants. The first step came immediately, as 31 of Fonorola’s senior managers were replaced by Sprint executives. “I am a big believer in getting this stuff over early,” says Koor. Gone is Fonorola president Jan Peeters, who Koor says could have stayed if he had wanted. There was no place for him in the new company, says Yankee Group managing director Iain Grant. “Peeters was building a boutique. Koor is building a locomotive.”
Regardless of Call-Net’s new strength, it never pays to underestimate a competitor as powerful as Bell, the dominant player and the local phone provider in Ontario and Quebec. Bell Canada’s quarterly revenues of $2.6 billion were double the annual revenues of Sprint and Fonorola combined, and Bell rings up almost as much profit every day as Call-Net records over a quarter. “Anybody who thinks that competing with Bell Canada is going to be easy should think again,” says analyst Ian Angus of Angus TeleManagement Group in Ajax, Ont. Koor himself has no illusions. As he prepares for a two-week travelling road show to raise money to finance the takeover, he muses that Bell’s treasurer could probably raise the same money with a couple of phone calls–and pay cheaper interest rates as well.
Bell and the other Stentor companies have been steadily losing market share to the upstarts, and this year, according to Yankee Group estimates, will hold about 65 per cent of the long-distance phone market, compared with 75 per cent only two years ago. But lately, Bell and its Stentor cousins have been showing a better understanding of the competitive threat from which the government had sheltered them until deregulation of the industry began in 1992. Grant says Bell’s recent move to flat-rate, 10-cents-a-minute calls was aimed squarely at Sprint and its televised pitch from Candice Bergen to get “the most for the least.” The new rates hurt Bell as well because the company is cutting its own revenues. But, Grant adds, “it also constrains Call-Net and puts some definite limits on how much it could be expected to grow its revenues.”
The Canadian Radio-television and Telecommunications Commission allowed full-scale competition in the long-distance market almost a decade after the industry had been deregulated in the United States. Since then, not only has the Stentor alliance of phone companies across the country lost market dominance, but prices have fallen dramatically. A 1997 study by KPMG, commissioned by Call-Net, notes that the actual price of an average long-distance call dropped from 21.5 cents in 1995 to an estimated 17 cents in 1998. Without competition, the study says, the 17-cent call would have cost 48 cents.
Sprint’s next challenge, and the coming battleground in the telecommunications industry, is the market for local phone service, expected to open up next year. Koor says his strategy will be to get into the top 25 markets in the first three years, installing switches to access the existing local lines of the phone companies, building Call-Net’s own network only as it builds its customer base. “We get the customer first and then invest the capital,” he says. So important is the local market, with revenues estimated by the Yankee Group at about $7.5 billion, that nothing would stop Sprint from getting into it. If he had thought the takeover would have diverted corporate attention from the local prize, adds Koor, he would not have pursued Fonorola.
The takeover is only the latest piece in the deconstruction and reconstruction of Canada’s telecommunications industry, an upheaval sparked both by deregulation and by the rise of the Internet and data transfer. The phone system was built to handle the sound of people talking. Increasingly, however, the digital hum of bits and bytes is taking over. Bell Canada estimates that by 2000, data will account for 80 per cent of phone-line traffic. Copper lines are being replaced by laser light and fibre optics. Technologies spawned by the Internet are replacing old-style telephone switches. The takeover last month by Northern Telecom Ltd., owned by Bell Canada parent BCE Inc., of Bay Networks in the United States, a leader in Internet technologies, is just one more example of the corporate response to the changes. So, too, was the revelation this spring that Telus Corp. was in merger talks with AT&T Long Distance Services.
The deal fell through, but the very thought of a Stentor partner making common cause with the competition was the most evident sign yet that the Stentor alliance, in its current form, is likely to be one of the casualties of the phone revolution. Bell has since announced that it is forming a new, national company to service business customers across the country, a role that Stentor has played up to now. “The writing is on the wall for Stentor,” Angus believes.
As Koor prepares to take his company into the coming battles against the giants, in an industry where changes come as fast as decisions can be made to meet them, he recalls the dark days of Call-Net, back when he decided that the company needed three things it did not have–a recognizable brand, market knowledge and access to technology. That was when he convinced Sprint Corp. to license its name and take a 25-per-cent equity investment in the company. Sprint’s U.S.-based executives arrived in Toronto by private jet. “Their Challengers were worth more than our company,” says Koor. Those days clearly are long behind him.
Shares and estimated (*) shares of the market for long-distance voice calls:
1996 1997 1998* 1999*
Stentor 75.4% 68.8% 64.9% 62.7%
Sprint Canada 10.2 12.8 14.9 15.6
Fonorola 2.5 3.7 3.9 4
AT&T 8.6 11 12 12.8
ACC 2.2 2.4 2.6 2.7
Other 1.1 1.5 1.9 2.2
A TOUGH NEW COMPETITOR:
Estimated 1998 shares of the market for long-distance voice calls:
BELL CANADA 37.1%
SPRINT- FONOROLA 18.8%
OTHER STENTOR 10.8%
BC TEL 9.7%
OTHER NON STENTOR
Source: Yankee Group in Canada