Telecoms Convergence: Focusing Innovation and Reversing Canadian Talent Flight

Head Table Guests

Ann Curran, Director, Corporate Development International and President-Elect, The Empire Club of Canada; Benjamin Cook, OAC Student, North Toronto Collegiate Institute; The Reverend Canon Philip Bristow, Incumbent of St. Phillips on the Hill, Unionville; Brian Porter, Director, Corporations and Foundations, University of Waterloo; Peter Currie, Vice-Chairman and CFO, Royal Bank of Canada; John MacLennan, Vice-Chairman and CEO, AT&T Canada; Gaylen Duncan, President and CEO, ITAC (Information Technology Association of Canada); Sharon Rudy, Vice-President, Spencer Stuart and Director, The Empire Club of Canada; and Claude Lajeunesse, President, Ryerson University.

Several months ago I had a call from Peter White who made me aware of a dynamic young man who would make an excellent guest speaker for a future Empire Club meeting.

I hear this from many people of course, but knowing Peter and valuing his advice I asked some questions about this individual. Here was a fellow who had made his fortune in global communications and did it while he was still very young. What really interested me was that he wanted to share his secrets with a Canadian audience so that it could benefit from his wisdom.

He apparently was planning to move back to Canada from the U.S. to continue his career where he was born, on the condition that Canada create an environment for investment that was more receptive to innovation.

He would also have some really challenging ideas for our Canadian policy makers, particularly the Minister of Industry Allan Rock.

He was also considering making a run for federal elected office to demonstrate that he meant business when he said that he wanted to make a difference.

I was hooked and I told Peter that I wanted to meet this man.

I met him and he was just as impressive as his advocate had described and working with him and his associate at putting this luncheon together has been a pleasure.

Let me now give you a more thorough overview of our guest Mark Bruneau.

Mark is currently the President and CEO of Adventis, a global management and strategy consultancy focusing on the converging global communications, computing, commerce, and content industries.

Prior to joining Adventis Mark worked as the Assistant to the President of Bell Canada International. He was with the management consulting firm Mercer before he founded Adventis in 1993.

Today Adventis has operations in Montreal, Boston, New York, Washington, San Francisco and London, a staff of over 200 and is considered an industry leader in global communications.

Mark's keen attention to the collision between global communications, computing, commerce and content industries has made him a valuable asset to many organisations.

He is an advisor to Fortune 500 executives on the growing phenomenon of content applications and bandwidth convergence and the overall massive restructuring of the global communications industry.

His educational credentials include a Bachelor of Commerce degree from the University of Ottawa and an MBA from Harvard Business School.

Today we are going to hear from Mark on the topic of where Canada should focus to rejuvenate its innovation, arrest its comparative decline, and reverse its talent flight.

Mark Bruneau

As a Canadian living in the U.S. for 18 years, I am struck by how good Canadians have it and by how much we doubt ourselves. I have family and conduct business here in Canada, went to school here and have many roots. It's a great country with enormous accomplishments and potential yet we beat ourselves up so much. There is much self-criticism currently about our comparative economic decline, lack of innovation, the low dollar, the "brain drain." Yet even as we grumble, we remain curiously complacent. Are we becoming a bi-polar people, self-critical and self-satisfied? Where is our sense of national adventure and ambition?

Today I want to talk about this apparent tension between self-criticism and smugness from an outside perspective, take a look at the issues we face, probe their root causes, and suggest ideas to "turbocharge" our innovation, productivity and prosperity.

First, a confession. I am one of the brains in the drain. I went to the U.S. for Harvard Business School and to start a business. The past 10 years of growing a business in a very competitive market give me a good basis for comparing and contrasting.

It is from this perspective that I'd like to look at some of the issues Canada is facing:

1. Per-capita GDP at three-quarters that of the U.S. and seventh in the OECD countries.

2. Per-capita real after-tax income has fallen by 8 per cent in Canada since 1989, while it has grown by 20 per cent in the U.S.

3. Our 60-cent dollar, which makes productivity-enhancing investments very expensive and Canadians poorer.

4. A corporate tax structure, which impedes the diversification of our economy away from commodities and their dollar-weakening effect.

5. A personal income-tax rate which is still too high when including the full picture of brackets, exemptions, deductibility of state taxes, capital gains, etc.

6. Comparatively high public debt-to-GDP ratio, 106 per cent in Canada versus 57 per cent in the U.S. according to a recent C.D. Howe Institute roundtable.

7. Deteriorating labour productivity, currently 20 per cent lower than the U.S. and growing at only one-third the rate.

8. Critical shortage of engineers and scientists.

9. Comparatively small venture-capital market, driving some of our innovators to the U.S.

10. Eroding sense of national identity. Other than that, everything is just fine.

Some of these issues are drivers, which we can fix, and some are effects. Taxation and regulation certainly are drivers. Just about everything else are effects, which will take care of themselves if we nail the root causes. Taxation and regulation drive behaviour around innovation and productivity. Competitiveness, productivity, and exchange rates reflect the results of this behaviour. If we can innovate, we can grow and compete and win, thereby increasing per-capita GDP and incomes, increasing employment, making lower taxes feasible, keeping our brains from draining, and strengthening our sense of identity.

This national prosperity chain starts with innovation. Innovation drives growth, productivity, and in turn prosperity. Innovation is critical to Canada because our labour costs are comparatively high and our domestic market is too small to drive large economies of scale, so we have to innovate to differentiate and we have to differentiate to survive. We can't compete on the basis of low labour costs like Mexico or Asia, and we don't have the cost advantages of large-scale production and large domestic markets like the U.S.

What we can do is increase the value of what we sell by making our products and services more innovative and specialised. To succeed, Canada needs to become one of the most innovative countries in the world, across the entire innovation chain from education to research to commercialisation to entrepreneurship.

Let's take a closer look at this decline in innovation. We are falling behind on several innovation metrics, and recent technology sector layoffs may hamper our ability to recover. We are losing ground as a world competitor and performing below our potential.

The worrisome metrics include:

Our innovation capacity at the bottom of the G7. Our under-investment in R&D (less than 1.5 per cent of GDP, almost half the U.S. and Japan, and sixth-lowest in the G-7).

Our tenth ranking in researchers per 1000 labourers.

• Our shrinking faculty teaching IT and micro-electronics.

• Our seventeenth ranking in private-sector employee training.

Our last ranking in patent applications per 10,000 population, behind Romania!

Our 25-per-cent share of sales from new products at half that of Germany.

Our 30-per-cent gap in investment in machinery and equipment compared to the U.S.

Our proportionally small venture-capital market vis-a-vis the U.S., a country roughly 10 times our size but with a VC market 25 times greater.

Our last ranking in the G-7 in manufacturing, against such indicators as growth in industrial production, rate of improvement in labour productivity, after-tax profit margins, rate of new product commercialisation, etc.

What's missing from the innovation discussion is a diagnosis of why we have declined, and specific prescriptions on how to turbocharge innovation and where to focus our innovation?

Let's explore why we have fallen behind in innovation and productivity and look at what we can learn from the best innovators.

We have fallen behind in innovation and productivity because it is unrewarding and too expensive for our businesses to make productivity-enhancing capital investments in new machinery and equipment. Our low dollar makes such investments too expensive and our tax and regulatory environment makes such investments unrewarding. The very investments in productivity gains required to boost the value of the dollar have become too expensive. Our dollar is low because of three factors:

1. A secular decline in global commodity prices. 2. Comparatively large national debt.

3. Comparatively low growth in productivity.

The uneven tax regime across industrial sectors in Canada favours the commodity sector and retards the diversification of our economy away from commodities, which still represent almost 40 per cent of our exports, and exports in turn represent 45 per cent of Canada's GDP As commodity prices have collapsed, so has our dollar.

According to a recent study by the C.D. Howe Institute, the effective tax rate, net of subsidies, in Canada is much lower than the U.S. for commodities like the forestry sector, where the Canadian effective tax rate is 31 per cent versus 40 per cent in the U.S., yet we tax value-added sectors much higher, like communications, where the Canadian effective tax rate is 50 per cent versus 29 per cent in the U.S., or manufacturing where the Canadian effective tax rate is 55 per cent versus 35 per cent in the U.S.

Simply said, we are under-taxing our commodity sectors and over-taxing sectors which would diversify our economy and lessen our dependency on dollar-weakening commodities. A higher dollar would make productivity-enhancing investments more affordable. Not making these investments makes us less productive, less prosperous, and chases our top brains away.

I reject recent comments in the press that Canadian firms are using the cheap dollar as a crutch without which they could not compete. Yes we should exhort companies to make investments in R&D and technology to boost their productivity and innovation. But the fact of the matter is that such investments have become prohibitively expensive because of the low dollar.

Let's not beat up on our small and medium manufacturers for deriving some export benefit out of a low dollar. Let's tackle the root causes by diversifying our economy, and further reducing the national debt. This will give Canadian companies the currency they need to make the right investments and not "hide" behind a low dollar.

While there are macro-economic levers to pull to boost productivity and innovation, there is also a lot that individual companies can do better. What can we learn from the best innovators? My firm, Adventis, has studied this in detail over the years, benchmarking how leaders such as IBM, GE, Intel, Sun, 3M, Cisco Systems, Motorola and others innovate.

Here are their innovation wins and sins. Innovation winners:

1. Focus innovation investment in a few core strengths.

2. Mobilise resources to outpace the market through speed.

3. Prototype early and often, allow failures.

4. Track and grow share of new markets and revenue from new products.

5. Balance both short-term and long-term R&D.

6. Pursue aggressive external venturing and win-win partnering.

As a result, these innovation winners can charge a 20-per-cent price premium over their competitors, offer a greater variety of products at a lower cost and in less time than their competitors, and outperform their industry in growth, profit and market share.

In contrast, innovation sinners:

1. Milk the cash cow to death and don't invest in productivity and innovation.

2. Discourage risk and punish failures.

3. Track only share of current markets and products. 4. Think too big and ignore beachhead opportunities. 5. Start few new projects and never kill old projects. 6. Partner poorly, seeking to vertically integrate and own every aspect of their value chain.

These innovation sinners typically under-perform their industry and suffer declining market share and margins. Let's apply this understanding of why we are falling behind in innovation and the lessons of the best innovators to enabling and focusing innovation in Canada.

First: enabling stronger innovation.

Let's start with the macro-economic picture, which the current government has, to its credit, made much sounder by reducing deficits, the debt, interest rates, and unemployment levels. But if the low dollar impedes productivity-enhancing investments, and the low dollar is driven by low commodity prices, national debt, and low productivity growth, let's tackle these root causes.

To make productivity-enhancing investments in equipment and machinery more rewarding, we need to improve our capital-cost allowance. To make such capital investments more affordable, we need to strengthen the dollar by lessening our export dependency on commodities, by equalising taxation levels across our industrial sectors. With almost 40 per cent of our exports in commodities, we have much further to go in becoming a knowledge economy.

Lessening our dependence on commodities and stimulating economic diversification and growth through tax adjustments will improve the dollar and increase national revenue, thereby further reducing the debt. Businesses will have the strengthened currency they need to make productivity-enhancing investments, which will boost productivity, and improve the dollar.

Canadian businesses don't need crutches. They need the right economic weapons: a fair-valued dollar and a fair tax regime.

We also need to invest more in innovative talent by reaching back in the innovation chain to our educational institutions, making our schools incubators of the knowledge economy. Beyond keeping our good talent in Canada, we need to make Canada a magnet for the most talented researchers, scientists, managers, innovators, and entrepreneurs from around the world, through aggressive and targeted immigration policies.

Second: focusing some of our innovation in what is a new and promising area, an emerging phenomenon which is transforming our economy and where Canada is showing pioneering innovation. I'm talking about convergence.

Convergence is the turbulent collision of the telecom, commerce and media/entertainment industries. It is happening right now and the convergence "moneyscape" is vast, about $3 trillion in North America. The traditional boundaries between communications, broadcasting, and multi-media industries are blurring, creating unprecedented opportunity.

Convergence is being enabled by the broadband Internet, and other technologies, which make communications pipes fatter, content thinner and the cost of transmission lower. Phone lines are becoming entertainment highways with the capacity to carry a vast array of multimedia products and services such as live broadcasting, messaging, movies, music, software, games, books and magazines.

The possibilities of combining the "one-to-many" economies of scale of broadcasting with the interactive and personalised "many-to-many" aspects of communications and a multimedia Internet are limitless.

For consumers, convergence means the fully networked home, mobile banking, ubiquitous commerce, personalised entertainment such as music, movies, radio, news, games, and interactive education on demand, etc.

For businesses, convergence means web-based collaborative working, true electronic commerce and customer management, and up-to-the-minute applications on demand. There is no blueprint for success in this unprecedented convergence collision chamber, yet leaders are starting to emerge, and Canada is one of them!

BCE, for example, is making convergence the centrepiece of its strategy, and is assembling a portfolio of telecom and media assets unmatched by any other telecom player--Bell Canada, CTV, the Globe and Mail, Sympatico-Lycos, and Emergis. BCE is creating breakthrough new convergent applications by leveraging this unique combination of communications and content assets and these new applications will generate hundreds of millions in new revenues for BCE.

Other convergence pioneers include Microsoft, AOL Time Warner, Sony, Disney and Vivendi Universal. However, more Canadian leaders like Nortel, Rogers, Research in Motion, Quebecor, Canwest Global and Silicon Valley North leaders, such as March Networks and JDS Uniphase, also need to join this convergence revolution.

Canada is quietly becoming a pioneer in this new field, rewriting the business and partnership models and value chain required to succeed. The convergence phenomenon knows no geographic limits and is not scale-dependent; it is skill-dependent. It is about knowing how to build new applications and new business and partnership models, which Canadians are very good at. Convergence is one example where we could focus our innovation and reap enormous rewards.

Now, how do we put all this together into an action plan to strengthen the Canadian prosperity chain? Much is being written about developing a national innovation strategy to develop a broad consensus on what is needed and to co-ordinate the efforts of businesses, governments, research institutions, academia, the financial sector and business associations.

The good news is that innovation, as a driver of productivity and prosperity, is on the national agenda and the current government gets it, but far more needs to be done. Achieving such a broad consensus and holistic coordination among all these stakeholders will take a long time. What we need are a few clear goals and actions around which we can rally resources.

Let me suggest three initiatives around innovation, taxation and diversification.

1. Innovation We must: Rebuild our innovation leadership by focusing it in a few areas like convergence where we have the ingredients and we have a lead.

Triple our R&D spending in select sectors.

Double the number of scientists and engineers in teaching faculties and in the work force.

• Make Canada the preferred choice for innovative centres of expertise in global companies regardless of their ownership structure or the location of their headquarters. Instead of emptying out our head offices, let's fortify them as centres of innovation where new products and services are developed and commercialised around the world.

• Increase our venture-capital markets to cultivate and keep our innovators. Let our financial institutions merge with each other to achieve the domestic and international scale they need, in exchange for their dramatically increasing their venture-capital spending in Canada.

Increase the investment in talent, encourage private-sector training in innovation and entrepreneurial management and improve our educational infrastructure in engineering and development.

• Invest actively in a sense of national identity and national "brand."

2. Taxation

• Further lower the combined federal-provincial corporate income tax rate.

• Extend tax credits to product development as well as to investments in new technology.

• Make productivity-enhancing investments in equipment and machinery more rewarding by accelerating depreciation allowances.

• Shift personal taxation more toward consumption and less on income. Talent that gets to keep more of its wealth and feels more prosperous will stay here.

• Give recent graduates a tax credit equal to the principal of their outstanding loan for every year they remain in Canada.

3. Diversification

Lower and equalise taxation levels across industrial sectors to reverse the current under-taxation on commodities and over-taxation of higher valueadded sectors, to increase the Canadian dollar and make productivity-enhancing investments in equipment and machinery more affordable.

• Investment and competition will drive innovation, not subsidies and protection. Together, these actions around innovation, taxation and diversification can boost our innovation, productivity and prosperity and make Canada a talent magnet again.

This would lift our confidence and loosen our paralysis of self-criticism and smugness.

I certainly don't have all the answers, but I will be coming back to work on them and urge more expat Canadians to do so. Let's create here some of the same attractive conditions that caused some of us to leave in the first place.

Let us replace self-criticism with action, and complacency with renewed national ambition.

Thank you very much.

The appreciation of the meeting was expressed by Sharon Rudy, Vice-President, Spencer Stuart and Director, The Empire Club of Canada.