Interesting Landscape of the Canadian Wireless Telecommunication Space

Kiran is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Canadian telecommunication industry is one of the largest in the world, with mobile penetration close to 85%. At present, the 85% penetration accounts for 25 million users; however, by 2015 the penetration level is estimated to reach 100%. This offers a massive opportunity for TELUS Corporation (NYSE: TU) to develop an aggressive expansion strategy in order to become the largest player in the Canadian telecommunications industry

Currently, the most dominant players in the market are TELUS, Rogers Telecommunication (NYSE: RCI) and Bell Corporation (NYSE: BCE) with a collective market share of approximately 90%. The remaining market is represented by relatively smaller companies and new entrants.

Robust numbers reported in the past

Fiscal year 2012 was a successful one for TELUS, as the company reported revenue of $10.9 billion, which is a 5% year-over-year increase. It is noteworthy for investors that the company reported free cash flow growth of 34%, as it exceeded $1.3 billion. Consistent growth in free cash flows can drive up the company's equity valuation in the future.

Telus TV reported 33% growth in subscriptions, as the customer count reached 678,000. In addition, the company reported a 5% increase in its wireless user base and broadband subscribers.

Moving ahead, company’s first quarter in 2013 was a good one, as the subscriber base grew to 7.7 million, which makes TELUS the second largest wireless telecommunication company in Canada. Additionally, the year-over-year revenue for the wireless segment also increased by $89 million to reach $1.5 billion.

The escalating demand for smart phones and tablets, coupled with growing broadband penetration, has enabled Telus into reporting consistent growth in its subscriber base and top line revenues.

Growth through acquisitions

The company recently attempted to enter an acquisition agreement with an upstart carrier Mobilicity for $380 million; however, eying heavy dominance of one entity in the wireless telecommunication space resulted in Industry minister Christian Paradis’ refusing to approve the acquisition.

Nevertheless, such a move on the company’s part exhibits its intent on growing through strategic acquisitions and alliances. That said, it must be considered that the Canadian government is focused on discouraging excessive dominance by a single company. Hence, it is now promoting overall trade fairness in order to provide smaller players a chance to establish their presence in the rapidly growing market.

Competitive landscape

The Canadian telecom industry is broadly divided between three major players and various other smaller players offering limited services.

TELUS faces direct competition from Rogers Communications and Bell Canada enterprises. Rogers communications is the market leader in the wireless telecommunication segment with a 34% share in the Canadian market and a massive subscriber base of 9.4 million.

During the first quarter of fiscal 2013, the company posted robust numbers. With a strong combination of communication and media assets, the company generated an operating profit of $4.8 billion. During the last five years revenue has escalated at a CAGR of 27% in the wireless segment. The company posted record sales for the first quarter, as the revenues from the wireless segment exceeded $750 million. The historical revenue curve of Roger Communication for the wireless segment exhibits a consistently growing trend.

Rogers Communications holds a significant position in the growing Canadian smartphone market with a 39% market share. As more people shift from traditional devices to smartphones, the company is expected to reap huge benefits to further strengthen its position in the market.

Looking ahead, with market penetration in the Canadian wireless segment pegged at 79%, the lowest amongst the developed nations, sufficient scope for organic growth exists for companies such as Roger Communications.

Bell Canada Enterprises is yet another fast-growing company in the Communications industry. The company strictly follows six strategic imperatives aimed at improving its core business portfolio and ensuring high quality services to its customers.

The six imperatives initiative is primarily focused on accelerating the wireless business, developing further on the growing wireline market, expanding its media leadership, making huge capital investments in broadband networks, controlling its cost structure and improving customer service.

Huge investments in advanced broadband networks coupled with strong focus on next-generation growth services has certainly enabled Bell Canada into competing with industry leaders such as Rogers Communication and TELUS.

Moreover, the strong financial and operational performance is attributable to the company’s rapidly transforming customer mix, as it shifts from traditional wireline voice services to next generation fibre and mobile services.

Bell Canada’s strategic investments in Astral Media, Maple Leaf Sports & Entertainment (MLSE) and Q9 Networks clearly exhibits its intent to diversify its customer base. During fiscal 2012, the company's cost cutting initiative led to Bell Wireline reducing its operating expenses by $166 million, in addition to $290 million yielded during 2011.

Why invest in this sector?

Interestingly, the Telecommunications industry is the fifth largest and fastest growing industry in the world. The wireless telecommunication services sector has experienced rapid growth over the past few years, as it is expected to surpass $2.7 trillion by the end of 2017.

The rapid growth experienced can be attributed to an estimated 80% wireless industry penetration in Canada, coupled with an exponential rise in demand of smartphone and tablets. In addition, the growing popularity of mobile commerce has further contributed to the wireless telecommunication industry.

With the telecommunication market in Canada dominated by the above-mentioned industry veterans, their position will be hard to shake. I expect TELUS to maintain its position as a frontrunner in the telecom space, as the company is committed on strengthening its position and widening its customer base by employing an aggressive M&A strategy.

I believe the trends are favorable for an investment in the wireless telecommunication industry; therefore, I recommend a long call on TELUS’ stock.

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Kiran Gulati has no position in any stocks mentioned. The Motley Fool recommends Rogers Communications (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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