Innovation in a sustainable economy

Achievements in economic growth

TELUS is focused on building sustainable economic growth for the benefit of our investors, customers, team members, suppliers and the communities where we live, work and serve. Our products and services can enhance the lives of Canadians, enable the success of our customers and contribute to the development of sustainable communities and Canada’s digital economy, while delivering long-term positive results for our investors. We contribute to the economy through our purchasing decisions and by paying taxes, providing jobs, driving innovation through the provision of state-of-the-art information communication technology, services and know-how for our customers, as well as through research and development and investing in next generation technology.

TELUS pursues an active research and development program to meet market demand for faster and more comprehensive telecommunications services for consumers. We believe the value of R&D on innovation and productivity comes from commercialization and adoption of new products, services and processes. To augment our approach, TELUS Ventures, co-invests with leading venture capital groups to support start-up companies in the telecom sector that are focused on the convergence of voice, enhanced data, digital media and wireless.

During 2010, Canada’s economy showed signs of improvement, with economic growth continuing through the fourth quarter of 2010 after emerging from a recession in the third quarter of 2009. The Bank of Canada reported in its July 2011 Monetary Report that it expects Canada's economic growth to be 2.8 in 2011, 2.6 in 2012 and 2.1 per cent in 2013. British Columbia and Alberta, which are two of the primary markets TELUS serves, are projected to grow at the fastest rates due to continued strong global demand for commodities being driven by major emerging markets.

Revenues in the Canadian telecom industry grew by an estimated two per cent in 2010, to approximately $42 billion, with wireless and data services continuing to act as growth engines for the sector. Offsetting this growth was continued wireline industry weakness in traditional voice service revenue, as well as declining long distance revenues. Bell Canada and its affiliated companies represented about 43 per cent of the total industry revenue. As the second largest telecommunications provider in Canada, and the largest in Western Canada, TELUS generated $9.8 billion in revenues in 2010, or approximately 23 per cent of the total industry revenues.

Bringing innovative wireless services to more Canadians

The Canadian wireless industry experienced increased growth in 2010 with estimated year-over-year revenue and EBITDA increasing by approximately five per cent and three per cent respectively. The Canadian wireless market continues to grow at a reasonable pace with an estimate of more than 1.7 million new subscribers in 2010, or an approximate 4.4 percentage point increase in penetration to approximately 73 per cent of the population. Wireless ownership as a percentage of the Canadian population is expected to further increase in 2011 by approximately 4.5 to five percentage points to 77.5 per cent or more. The wireless market in Canada continues to present a meaningful growth opportunity and is most comparable to the United States, which has a penetration rate of approximately 97 per cent.

The demand for wireless data services has been growing strongly and continues to be a key driver of revenues as Canadians are increasingly using their wireless devices for email, text, picture, video and instant messaging, social networking, web browsing, applications, gaming and video-streaming. As a result, wireless data revenue in Canada increased by an estimated 34 per cent in 2010 to $4.1 billion and represented an estimated 25 per cent of the industry’s monthly average revenue per subscriber unit (ARPU). This compares to approximately 34 per cent of ARPU in the United States, suggesting an ongoing growth opportunity in Canada. It is also expected that major mobile platforms will support cloud-based services to satisfy customer demand and allow access to streaming content, such as music and video, from virtually anywhere and on any device.

This growth in adoption and usage of data services in Canada is being facilitated by the increasing availability, popularity and affordability of smartphones, as well as increased adoption of mobile Internet keys. In addition, the market for tablet devices, which operate on mobile networks or on Wi-Fi, is expected to be an accelerating growth segment in 2011, as Canadians increasingly demand portable computing solutions with wireless Internet connectivity. While a tremendous opportunity for TELUS, the increasing adoption of a wider range of smartphones and Internet-enabled wireless devices, which are more expensive than traditional wireless handsets, are placing strains on network capacity and impacting industry margins. With a multi-year sales agreement, there is usually a large upfront device discount provided by wireless carriers, resulting in initial negative earnings and cash flow for the carrier, but also higher average lifetime revenue.

Hyper-connectivity has the potential to greatly increase network demand and traffic as Canadians increasingly want personal and networking connectivity. New options in hardware and additional wireless services are enabling consumers to do more in more places than ever before. To better manage this growth, Canadian wireless providers continue to roll out faster, next generation high-speed wireless networks that provide consumers with increased download speeds, while increasing network capacity. However, additional wireless spectrum will be required.

By leveraging our network sharing agreement with Bell Canada, TELUS successfully launched an extensive next generation network based on HSPA+ technology in 2009, which offers speed and coverage advantages by supporting manufacturer-rated peak data download speeds of up to 21 megabits per second (Mbps) and now covering more than 97 per cent of the Canadian population. This gave TELUS customers more choices, including a greater selection of the newest devices such as the iPhone 4 and other smartphones, and international roaming to more than 200 countries. TELUS continued to enhance this HSPA+ network into 2011 with the commercial launch of 4G HSPA+ dual-cell technology in March, which effectively doubles data speeds. This next generation network better positions TELUS to meet data capacity demands in the foreseeable future, while allowing for a richer user experience and applications of greater utility. Upgrading to dual-cell technology is a natural progression on the path to 4G+ long-term evolution (LTE) technology, which is expected to to support manufacturer-rated peak download speeds of up to 150 Mbps and upload speeds of up to 70 Mbps. Construction on TELUS’ LTE network will begin in the latter half of 2011 in major urban markets across Canada, with the planned launch expected in 2012. TELUS’ LTE network will operate on the Advanced Wireless Services (AWS) spectrum that TELUS purchased for $882 million in Industry Canada’s auction process in 2008. We are committed to building out our LTE network beyond major urban centres across Canada if we are able to secure 700 Mhz spectrum in the auction expected in 2012. This spectrum has superior propagation capabilities in covering Canada’s expansive rural geography.

To support technology evolution and to provide capacity to satisfy increasing demand for data services, TELUS is focused on increasing its wireless spectrum position. The ability to acquire additional spectrum is dependent on the timing and the rules established by Industry Canada. The federal government initiated a consultation in November 2010 on the policy and technical framework to auction spectrum in the 700 MHz band. We expect a spectrum auction will be held in 2012. However, there is no guarantee that the Canadian government will not reserve spectrum for new wireless entrants or adopt some open access provisions for some of this spectrum.

Wireless competitive pressures in the Canadian market continue to intensify. Four new wireless entrants launched or expanded wireless services in 2010 in various urban centres across Canada including WIND Mobile, Mobilicity, Public Mobile and Quebec-based cable-TV company Vidéotron. TELUS will also face more competition in B.C. and Alberta from Shaw Communications’ entry in wireless, now rescheduled to early 2012. In response to this competitive activity, Bell and Rogers have also re-launched or introduced new discount brands. Koodo Mobile®, TELUS’ postpaid value brand, continues to position our company well against new wireless entrants and incumbent discount brands. We have evolved the Koodo® brand strategy from basic talk and text to include a limited selection of feature-rich and value price smartphones for Canadians. In addition, starting in late 2010, we also adjusted our Koodo pricing to include unlimited local calling and texting plans in response to competitive market developments.

To continue to deliver on our brand promise and to increase price transparency to Canadian consumers, TELUS offers Clear & Simple® rate plans, which do not have system access and carrier 911 fees. Our plans also include a new device upgrade program that helps customers obtain new phones without having to wait for their contract to expire, and free data usage notifications that help customers manage their data usage.

Providing integrated wireline solutions

In contrast to wireless, expectations for revenue and earnings in the mature wireline segment are modest. Traditional telecom services such as home phone and long distance continue to experience decline due to technological and wireless substitution as customers are increasingly adopting new Internet Protocol (IP), data and wireless services. Canada’s four major cable-TV companies had an estimated 3.7 million telephony subscribers at the end of 2010, up by approximately 500,000 from one year earlier. Canada’s three major telecom companies had more than 600,000 total line losses in 2010.

Competition in fixed-line Internet and television remains intense as cable-TV companies continue to increase the speed of their Internet offerings and intensify customer acquisition offers. In addition, over-the-top content providers such as Netflix and Hulu, as well as Apple and Google, are anticipated to compete for a share of the television and video-on-demand viewership in the Canadian market.

Vertical integration of the Canadian broadcasting industry also has been a growing trend in 2010 with Shaw acquiring television assets of Canwest at the end of 2010 and BCE’s proposed acquisition of CTV. The Canadian Radio-television and Telecommunications Commission (CRTC) held a public policy hearing in June 2011 on the effects of consolidation and vertical integration in the Canadian broadcasting industry. TELUS is encouraged that the CRTC has recognized the importance of competition in the carrier market, and is seeking to implement appropriate safeguards against self-dealing and anti-competitive behaviour regarding content. TELUS believes it is not necessary to own content to make it accessible on an economically attractive basis. TELUS’ differentiated approach, which is consistent with our content strategy, is to aggregate, integrate and make accessible the best content and applications to customers, through whichever device they choose.

To help alleviate the competitive challenges in the traditional wireline segment, TELUS’ Future Friendly® Home strategy is focused on enhancing retention and loyalty through differentiated and multiple service offerings. TELUS is increasingly offering bundled products with an integrated set of services that provides customers more freedom, flexibility and choice.

TELUS launched its new brands Optik TV™ (IP-based TV service based on the Microsoft Mediaroom platform) and Optik Internet™ in urban Alberta and British Columbia markets in 2010. TELUS now offers an enhanced and flexible TV experience to Canadians with more than 500 channels, including 100 in high definition and superior services such as PVR Anywhere, which gives customers the ability to record and play back shows on up to six TVs in the home. In addition, Remote Recording allows customers to use their smartphone, tablet or Internet-connected computer to schedule their PVR recordings. IP-based TV also allows us to offer Canadians cool new applications such as Facebook for Optik TV.

These new IP-based services are supported by TELUS’ wireline broadband network, which has been upgraded and expanded throughout 2009, 2010 and into 2011 to meet the evolving bandwidth needs of our customers and to support new innovative services for Canadians. In 2010, we substantially completed our ADSL2 broadband build to 2.1 million households in Alberta, B.C. and Eastern Quebec communities, while continuing to overlay VDSL2 technology, enabling us to further enhance Internet and TV viewing experiences with significantly faster network speeds. The VDSL2 overlay is expected to be completed in 2011.

In addition to our investments in broadband and related services, TELUS is committed to help transform healthcare in Canada. Over the past three years, TELUS invested more than $800 million in information and communications technology that can reduce healthcare costs, better connect patients, improve health outcomes for patients and drive the prevention of illness.

In 2010, TELUS became the first Canadian company to launch an innovative e-health platform, called TELUS Health Space®. This platform enables Canadians to create, store and manage their personal and family’s health records and securely share them with their care providers. Through trials with 2,000 team members and 200 patients and caregivers in Quebec, we are actively shaping this new service that should soon be available to millions of Canadians. Notably, TELUS has earned recognition as the number one Canadian Healthcare Technology Company by Branham Group for three years in a row.

We believe our consistent strategic focus on providing a full suite of valuable and reliable communications services; delivering differentiated, premium national business solutions in data and IP; exposure to growth services such as wireless, data and IP including high-speed Internet and differentiated TELUS TV®; and the continued enhancement of national wireless and broadband networks, solidly position TELUS for growth in the years ahead.

New national headquarters to be built

TELUS has also demonstrated its commitment to the economy and environment by announcing the construction of a new national headquarters in Vancouver, British Columbia, which will make a contribution to the city's goal of becoming the greenest city in the world. Named TELUS Garden, the project will radically transform an aging block of downtown Vancouver into a beautiful architectural icon of the most technologically and environmentally advanced sites of business, employment and living in the world.

The project will create half a million square feet of new office space and 500 new residential units, while setting new standards for environmental sustainability. The 22-storey signature office tower will be the first building in Canada built to the new 2009 Leadership in Energy and Environmental Design (LEED) Platinum standard and the 44-storey residential tower will be built to the LEED Gold standard. The project's construction is expected to pump hundreds of millions of dollars into the local economy and create three million person-hours of employment during construction, scheduled to begin in late 2011 and to be complete in 2015. Once the building is occupied, the site's business and residential tenants are expected to contribute an estimated $8 million to $10 million in new tax revenue to the city annually. TELUS has partnered with Westbank (a leading residential and commercial developer) to lead the project, and engaged Henriquez Partners Architects for its design.

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