Telus Corp. adopted a strategy a decade ago in response to deregulation – expanding outside of its B.C.-Alberta markets and investing heavily in Internet, wireless and, more recently, TV subscription service.
When asked during the Stanley Cup playoffs how Telus (TSX:T, T.A; NYSE:TU) has managed to rank No. 1 on Business in Vancouver’s top 100 public companies list since 2002, company CFO Robert McFarlane clearly had hockey on his mind.
“Guess what, they’re coming in our backyard,” McFarlane said of telecoms like Bell Mobility. “We’re going to play defence with the puck? No, we’re going to go on offence.”
As Bell moved west, Telus moved east and is now the primary telecom provider for the governments of Ontario and Quebec.
If market analysts are the sport commentators in this analogy, they depict Telus as skating circles around Shaw Communications Inc. In February, BMO Capital Markets downgraded Shaw’s investment rating – a direct response to Telus’ aggressive move into the TV subscription-service space.
“We are growing increasingly concerned with Shaw’s ability to withstand competitive pressures from Telus, specifically its Optik TV service,” Tim Casey, BMO Capital Market’s cable and media analyst, wrote in February of this year.
With 35,000 employees worldwide (including 8,200 in B.C.) and $9.8 billion in annual revenue, Telus is B.C.’s largest public company.
It is a company that was forced, by the advent of the Internet and mobile phone industry, to rapidly change the fundamentals of its business.
Ten years ago, 72% of Telus’ revenue was from landline phone service. Today, that accounts for just 25% of revenue, with wireless and data accounting for 75%. Its market share of wireline service in Canada today is 16%; its market share for wireless is 29%.
Telus was created more than a decade ago with the merger of Telus (based in Alberta), BC Tel and Québec Telephone to become Canada’s second-largest telecom. In 2000, Telus bought Ontario-based mobile phone company Clearnet Communications for $6.5 billion.
McFarlane was Clearnet’s CFO – a title he kept in the newly merged company. At the time, he said one pundit wrote that the acquisition was foolhardy, because 20% of the population already had cell phones and that the market was unlikely to grow much beyond that (it now stands at 75%).
Telus has also been criticized for not following Rogers’ and Bell’s model of acquiring media assets.
Major broadcasters in Canada are now owned by service providers. Bell owns CTVglobemedia, Rogers owns Citytv, Sportsnet and several other stations and Shaw owns Global Television. Telus owns no media assets.
Rather than invest in a sector in which it has no experience, Telus has deliberately focused on being a provider, not a creator, of content. While Bell was spending $1.3 billion to buy CTVglobemedia, Telus last year invested $1.7 billion to expand its fibre-optics cable network ($670 million of which is in B.C. alone).
“Our view is that a quarter of our business is our networks, and we’re going to invest in our networks,” McFarlane said. “And that’s going to enhance our position more than taking a flyer on acquiring content that we’ve never previously owned.”
That expanded network capacity has allowed Telus to rapidly grow its Optik TV service, which is TV via Internet. Telus now has 358,000 Optik TV subscribers in B.C. and Alberta.
Telus’ market share of television service in Canada is just 2.5% ($230 million of a $9.3 billion space). But BMO predicts the company is positioned to attract 125,000 to 150,000 Optik TV subscribers per year.
And while Shaw is expected to soon jump into the mobile-phone business, Casey said Telus “has the financial scale and momentum in wireless to remain aggressive in 2001 and 2012, when Shaw expects to launch a wireless product.”
Smartphone use in Canada is growing so rapidly, Telus is putting much of its energy into just keeping up with the ever-growing demand for the wireless spectrum.
The company is working on increasing data speeds three to five times over HSPA+ with LTE (long-term evolution), and recently announced a deal with Skype to produce the first Skype-branded phone in the Canadian market.
“About one-third of our overall subscriber base now has smartphones,” McFarlane said. “A year ago it was half that.”