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 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 (R&D) program to meet market demand for faster and more comprehensive telecommunications services for consumers. We believe the value of research and development on innovation and productivity comes from commercialization and adoption of new products, services and processes. To augment TELUS' R&D 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. Since July 2001, TELUS Ventures has invested nearly $92 million in 30 companies, including 12 Canadian companies. There are currently 12 active companies in the portfolio and investments of approximately $1.6 million were made in 2011.
In 2011, Canada’s economic growth slowed to an estimated 2.4 per cent, from 3.2 per cent in 2010. The Bank of Canada reported in its January 2012 Monetary Policy Report that it expects Canada’s economic growth to be 2.0 per cent in 2012 and 2.8 per cent in 2013. Western Canadian provincial economies are projected to grow at the fastest rates, due to strong global demand for commodities.
In 2011, revenues in the Canadian telecommunications industry (including TV and excluding media) grew by an estimated three per cent to just over $51 billion, with wireless and data services continuing to be growth engines for the sector. Offsetting this growth was continued wireline industry weakness in legacy voice service revenues. Bell Canada (excluding media) and its affiliated companies represented about 34 per cent of the total industry revenue.
As one of the largest telecommunications companies in Canada, TELUS generated $10.4 billion in revenues in 2011, or approximately 20 per cent of the total industry revenue. TELUS’ annual revenue increased by 6.2 per cent, with revenues in the high growth areas of wireless along with wireline data representing approximately 77 per cent of total revenues (74 per cent in 2010). The Company has targeted consolidated revenue growth of three to six per cent in 2012.
The Canadian wireless industry experienced continued growth in 2011 with estimated year-over-year revenue and earnings before income, tax, depreciation, and amortization (EBITDA) increases of approximately 4.5 per cent and two per cent, respectively (five per cent and three per cent, respectively, in 2010).
The Canadian wireless market continues to grow at a healthy pace with an estimated 1.6 million new subscribers in 2011 compared to 1.7 million in 2010. This reflects an increase in the penetration rate (subscribers as a percentage of population) in 2011 of approximately 4.3 percentage points to just over 77 per cent, compared to an increase of approximately 4.4 percentage points in 2010. The wireless penetration rate in Canada is expected to increase further in 2012 by between 4.0 and 4.5 percentage points. At 77 per cent penetration, the wireless market in Canada continues to support good growth, which is indicated by the generally comparable market in the U.S that has a penetration rate of approximately 101 per cent.
A key driver of wireless revenue growth continues to be the increased adoption and usage of data services such as text messaging, social networking, web browsing, application usage, gaming and video-streaming. In 2011, wireless data in Canada represented an estimated 30 per cent of industry’s average revenue per subscriber unit (ARPU). This compares to approximately 39 per cent in the U.S., 31 per cent in Europe and 52 per cent in the Asia-Pacific region, suggesting a significant ongoing growth opportunity in Canada. The higher proportion of data usage in Asia is due in part to a very low rate of penetration of wireline Internet service to households in many Asian countries. The higher proportion of data usage in the U.S. is due in part to the introduction of the iPhone by Apple two years earlier than in Canada.
Data growth is being driven by the increasing availability, model range and popularity of iPhone, Android and BlackBerry smartphones, as well as increased adoption of tablets and mobile Internet keys. Increasing sales of more expensive smartphones are, however, impacting industry margins. With a multi-year sales agreement, there is usually a large upfront device subsidy provided to the customer. Although this initially results in a negative profit margin, it also is associated with higher ARPU and lower churn rates, which result in higher average lifetime revenue and value. Tablet devices operating on mobile networks are expected to be a growth segment in 2012. Customers want mobile connectivity to the Internet, and are increasingly using enhanced portable computing services.
It is expected that major mobile platforms will increasingly sell streaming content services in 2012, such as music, TV and video, as consumers become more comfortable with cloud-based computing, a web-based way to cost-effectively process, manage and store data. It is expected that major mobile platforms will transition to supporting cloud-based services that will allow customers to access both corporate and personal data (e.g. photos, streaming video and music) from virtually anywhere, on multiple devices.
Growing wireless data services
The demand for wireless data services is expected to continue to grow. Factors related to this increasing demand include:
- Ongoing investment in faster network technologies such as high-speed packet access plus (HSPA+) dual-cell and long-term evolution (LTE) that provide a richer user experience and more useful applications
- Increasing need for personal connectivity and networking
- Increasing affordability and selection of smartphones and Internet-only devices, including mobile Internet keys and products such as tablets and e-book readers
- Intensifying wireless competition
- More affordable data plans.
Growing data traffic
Increasing data traffic represents a growing challenge to wireless carriers’ networks and their ability to manage and serve this traffic. Industry Canada announced rules for the auction of additional wireless spectrum, including the 700 MHz spectrum, with an auction expected to be held in late 2013 for that spectrum. Industry Canada also announced plans for a further spectrum auction of 2500 MHz in the 2014 timeframe, which is best suited for urban areas. It is critical that additional spectrum be made widely available to sustain the ongoing high level of data growth, and that TELUS has the ability to acquire spectrum in both urban and rural markets to support increasing demand.
Network and technology growth
To better manage anticipated increases in data traffic and to capitalize on Canada’s wireless growth opportunity, established Canadian providers continue to roll out faster, next generation high-speed wireless networks with increasing capacity. TELUS successfully launched an extensive next generation network based on HSPA+ technology in 2009, and enhanced this network in March 2011 with a commercial launch of HSPA+ dual-cell technology, offering manufacturer-rated data speeds of up to 42 Mbps (expected average download speeds of 7 to 14 Mbps with a compatible device, while actual speed may vary by device being used, topography and environmental conditions, network congestion, signal strength and other factors). In addition to the superior capabilities and higher capacity delivered by HSPA+, this wireless infrastructure supported TELUS’ migration to LTE, which is rapidly emerging as the global standard for wireless broadband.
Established companies such as TELUS continue to upgrade networks and invest in new LTE technology to bring innovative services and the latest data-capable devices to their customers, while new entrants have focused on price discounting and basic services in major urban markets. TELUS launched services on its urban LTE network in February 2012 and expects to expand urban coverage to reach more than 70 per cent of the Canadian population by the end of 2012. LTE technologies are expected to deliver manufacturer-rated peak data download speeds of up to 75 Mbps (typical speeds of 12 to 25 Mbps expected), while at the same time introducing significant improvements in network capacity and performance. The potential roll-out of LTE into rural Canada will be dependent on TELUS acquiring spectrum in the expected Industry Canada spectrum auction of frequencies in the 700 MHz spectrum band expected in 2013.
Competitive intensity among established carriers and new entrants in the wireless market in 2012 is expected to remain high.
To better compete in the wireless market, TELUS has significantly intensified its focus on customer experience. We continue to enhance the strong TELUS brand with the evolution of our Clear and Simple customer approach first launched in late 2009. This includes significantly reducing the number of rate plans; sending data usage notifications; offering in-store learning centres; streamlining the device line-up; facilitating early device upgrades; and offering simplified and lowered international roaming rates. This Customers First approach has contributed to achieving one of the lowest churn rates in the Canadian wireless industry. In 2011, TELUS also enhanced the offering of its very successful value-oriented Koodo brand by way of an expanded range of smartphones and nationwide calling.
Given TELUS’ high and growing exposure to wireless (52.5 per cent and 58 per cent, respectively, of 2011 revenue and EBITDA), strong brands, leading-edge value-added products, high-value smartphone growth and new broadband network technologies, we are well positioned to bring wireless to more and more Canadians and benefit from ongoing growth in the Canadian wireless market.
Growing wireline with focus on data
The wireline telecommunications market is expected to remain very competitive in 2012 with low revenue growth and flat or declining EBITDA, as legacy services such as local and long distance telephony continue to decline due to consumer migration to email and messaging services, as well as to wireless and voice over IP (VoIP) services. Canada’s four major cable-TV companies had an installed base of approximately 3.9 million telephony subscribers at the end of 2011 or a national consumer market share of approximately 32 per cent, up 1 per cent from 2010. Other non-facilities-based competitors also offer local and long distance VoIP services and resell high-speed Internet solutions. This competition, along with technological substitution such as to wireless, continue to erode TELUS’ residential network access lines (NALs) and associated local and long distance revenues. In 2011, TELUS’ total NALs decreased by 3.9 per cent or 146,000, comparing favourably to 2010 (when TELUS NALs decreased by 5.7 per cent or 227,000), as well as to North American peers. Improvement in 2011 was partly due to enhanced retention and loyalty in response to multiple service offerings and bundling with Optik TV™ and Optik High Speed™ Internet.
Cable-TV companies continue to increase the speed of their Internet services and intensify customer acquisition offers. Canada’s four major cable-TV companies have over 5.6 million Internet subscribers, up from approximately 5.4 million in 2010, while telecommunications companies have 4.4 million Internet subscribers, up from approximately 4.3 million in 2010. Although the high-speed Internet market is maturing with over 76 per cent penetration in TELUS’ incumbent region in Western Canada and almost 75 per cent penetration across Canada, subscriber growth is expected to continue over the next several years.
The growing popularity of watching TV anywhere is expected to continue as customers demand the ability to view content on multiple screens, including computers, smartphones and tablets, as well as on TVs. In early 2012, TELUS launched Optik™ on the go, allowing TELUS customers to watch certain on-demand movies and shows anywhere, anytime on a laptop, tablet or smartphone. In addition, over-the-top (OTT) content providers like Netflix, Hulu, Apple and Google, are competing for their share of viewership. However, it is not clear if this competition replaces or simply complements, existing TV services. Wireline service providers are monitoring developments in the OTT space and evolving their content strategy and approach to the market to compete with these non-traditional offerings.
Growing loyalty through choice
To help alleviate the competitive challenges in legacy wireline services, TELUS’ Future Friendly® Home strategy has successfully increased revenues, retention and loyalty through multiple service offerings. In mid-2010, the Company launched new TELUS brands Optik TV™ (IP TV based on the Microsoft Mediaroom platform) and Optik High Speed™ Internet in urban Alberta and B.C. markets, and later in Eastern Quebec. Optik™ offers an enhanced TV experience with premium and differentiated services such as PVR Anywhere (enabling customers to record and play back shows on up to six TVs in the home), Remote Recording (enabling customers to use their smartphone, tablet or Internet-connected computer to schedule their PVR recordings when away from home) and other features such as Facebook TV.
TELUS Satellite TV® service in Alberta and B.C. complements the Company’s Optik TV™ service, enabling TELUS to serve households that are outside of the urban/suburban Optik TV™ network footprint, and leverages TELUS’ strong distribution and mass marketing capabilities. This expands the addressable market for TELUS TV® to more than 90 per cent of households in the two provinces.
In 2011, TELUS added 196,000 new TV subscribers and increased its TV subscriber base by 62 per cent to 509,000.
Growing IP-based services
TELUS’ new IP-based services are supported by our wireline broadband network, which has been upgraded significantly from 2009 to 2011 to meet the evolving bandwidth needs of customers. In 2011, TELUS expanded its broadband network in communities in Alberta, B.C. and Eastern Quebec. By early 2012, coverage with asymmetric digital subscriber line 2 plus (ADSL2+) or very high bit-rate digital subscriber line 2 (VDSL2) technology reached nearly 2.3 million homes. ADSL2+ allows broadband download speeds of up to 15 Mbps, and the VDSL2 technology overlay allows download speeds of up to 30 Mbps (enabling delivery of three simultaneous HD signals into the home).
Combined with wireline local and long distance, wireless and high-speed Internet and entertainment services, TELUS is increasingly offering bundled products to achieve competitive differentiation with an integrated set of services that provides customers more freedom, flexibility and choice. Cable-TV companies are continuing to roll out higher-speed Internet services, Internet telephony and digital cable-TV services to support growth. In 2011, TELUS’ TV and high-speed Internet net subscriber additions more than offset NAL losses for the first time in seven years, as broadband investments and bundled offers including its premium Optik TV™ service, allowed us to improve our competitive position relative to our main cable-TV competitor.
The Canadian broadcasting industry has become more vertically integrated, with most of TELUS’ competitors owning broadcast content. In 2011, after public hearings, the Canadian Radio-television and Telecommunications Commission set clear safeguards to ensure healthy competition. TELUS’ differentiated approach, consistent with our content strategy, is to aggregate, integrate and make accessible the best content and applications to customers, through whichever device they choose. TELUS believes that it is not necessary to own content to make it accessible on an economically attractive basis.
Our consistent strategic focus on providing a full suite of valuable and reliable telecommunications services; exposure to growth services such as wireless, data and IP, including Optik TV™ and Optik High Speed™ Internet and ongoing investments to enhance our wireless and broadband networks, position us well for revenue and EBITDA growth.