Executives at BCE Inc. say the rising cost of sports programming and a library of HBO shows are driving up expenses in its media division.
Chief executive George Cope told analysts on a conference call Thursday that Bell Media continues to grow market share, but it's also "clearly beginning to be impacted by higher content costs," which he deems essential to head off competitors.
"That's a conscious strategic investment we will make which will have an impact on the media businesses," Cope said after BCE reported stronger third-quarter profits.
The Montreal-based telecom company has been bulking up on the rights to professional sports games for its three new TSN channels — TSN3, TSN4 and TSN5 — which launched earlier this fall.
Bell is also working on a video-on-demand service, codenamed "Project Latte,'' that features the entire HBO scripted off-air library, including hit series like "The Sopranos,'' "The Wire'' and "Sex and the City," on set-top cable boxes.
None of the programming comes cheap, and Cope said that's a factor he's taken into consideration, though he did not provide any figures.
"It's absolutely the right thing to do strategically because it's what Canadians are telling us they want to view and how they want to view it," he said.
Bell made its foray into subscription video services after Rogers Communications (TSX:RCI.B), its biggest rival in many market segments, announced its own streaming video platform called Shomi, which offers a slate of hit TV shows and some movies.
Both services are considered alternatives to popular U.S. streaming company Netflix, which has been making inroads in Canada for several years.
"What we're learning is the way people view content is changing and which pipe it's (transmitted) over in the end should be irrelevant," Cope said.
"We're making an investment on the content side and that revenue will take awhile to generate," he added.
The impact was evident in third-quarter results as adjusted earnings in the company's media division fell 8.5 per cent to $182 million on the higher costs for sports broadcast rights. Revenue rose less than one per cent to $665 million.
Overall, BCE Inc. (TSX:BCE) benefited from growth in its wireless revenue and additions to its Internet subscriber base.
Net income grew to $600 million, or 77 cents per share, an increase of about 75 per cent from the same time last year when the profit was reduced by costs tied to a major acquisition.
Adjusted profits, which removed special items related to its takeover of Astral Media, rose 11 per cent to $648 million or 83 cents per share. That was five cents above analyst expectations of 77 cents per share.
Bell Canada, the main BCE subsidiary, had $4.6 billion in revenue, up 1.8 per cent from a year before, with most of the growth from its wireless services.
Breaking down the Bell divisions, wireless revenues lifted seven per cent to $1.6 billion, while revenue from wireline services slipped by less than one per cent to $2.47 billion.
In addition to Bell, BCE had about $699 million in revenue from Bell Aliant — a subsidiary that has been taken private.
Last summer, Bell Media laid off about five per cent of its Toronto workforce, or about 120 employees, due to "financial pressure" in its advertising and subscription TV services.
To help offset the expenses of launching its video-on-demand service, Bell has struck a distribution arrangement with Telus (TSX:T) that will make it available on Telus Optik TV set-top boxes.
Bell Media president Kevin Crull said on Wednesday that other partners will be announced closer to its launch, which is expected sometime next year.
Shares of BCE were 40 cents lower at $50.68 in late afternoon trading on the Toronto Stock Exchange.
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