Shaw and Videotron riding cable telephony wave

Last week, Shaw Communications increased the company’s annual dividend to shareholders for the fourth time in as many quarters while Videotron hit the 500,000 home phone subscriber mark.

Both companies have kickstarted growth engines over the past two to three years thanks in large part to the introduction of home phone service in Western Canada (Shaw) and Quebec (Videotron) respectively.

When does the home phone success end for Shaw and Videotron end? It’s nowhere in sight as far as I can tell. I’d expect 50% of Canadian households will subscribe to a home phone service from what we still (strangely) call the cable TV providers in 5 years time compared to about 15% penetration now.

Yes, it’s true Bell will soon have some pricing flexibility once the local phone market is deregulated as expected this summer. The incumbents, namely Bell Canada, will cut prices in select instances to retain customers but the flexibility of a company like Bell is limited. That’s because it’s still a company that generates the bulk of its profits from the home phone.

But Bell and the other incumbents still rely on wireline customers for profitability - a scary proposition for investors. Telus, of course, is most heavily exposed to wireless with about 50% of EBITDA generated from wireless. Bell, the country’s largest provider of wireline services, has lost the most ground and stands to lose more in such a scenario.

It’s easy to see why shares in Rogers and Shaw are perched at a 5-year high.

July 17, 2007 | Filed Under News Items and Commentary