The Canadian Radio-Television and Telecommunications Commission (CRTC) also released its first-ever comprehensive study of the domestic telecommunications industry; painting by the numbers, Canada on the whole is a relatively mature market, but there are areas of high-growth potential.

Overall telecom revenue increased 5.3 percent to CAD38 billion in 2007. Most of that growth came from cell phone users (up 8 percent) and broadband Internet subscribers (up 12 percent). Mobile phone revenue grew 14 percent to CAD14.4 billion, more than any other portion of the telecom sector. But Canadians still lag behind consumers in other developed countries when it comes to owning cell phones. More than 98 percent of Canadians had access to wireless services in 2007; only 61 percent, or 20.3 million people, subscribed.

And the CRTC concluded that cable companies bundled TV, wireless, home phone and Internet service together to make significant gains in all those areas during 2007. The quadruple play attracts subscribers by offering modest discounts. Consumers can reduce their monthly bills, but they tend to spend more money with a single-service provider, rather than spreading it around to several suppliers.

Economic softness south of the border has had a relatively modest impact on results of bellwether US wireless carriers and cable operators. Those in Canada have benefited from the country’s ability to keep bouncing better than it ever has under such circumstances. “Decoupling” is too dramatic a word, but the evidence so far suggests our neighbor to the north won’t suffer as deeply or as long as the US.

So from all that, a couple telecom opportunities stand out up north.   

Industry Canada set the rules of its recently concluded wireless spectrum auction to enable the penetration of the mobile telephone service market by a new competitor. The federal agency set aside 40 percent of the airwaves for new entrants, restricting existing players to bid on the other 60 percent.

A tilted playing field distorted the contest to the extent that 15 bidders combined to more than double forecasts by generating CAD4.25 billion in federal revenue. Analysts estimated Ottawa’s haul at around CAD2 billion before the first of what was a 331-round slugfest.

Incumbents Rogers Communications (NYSE: RCI, TSX: RCI.B), Telus Corp (NYSE: TU, TSX: T) and Bell Canada (NYSE: BCE, TSX: BCE) entered the auction with market shares of 37 percent, 28 percent and 27 percent, respectively, and put up an aggregate CAD2.6 billion for 174 licenses covering about 90 million people to hold those lines against the upstarts.

Privately controlled Globalive Communications bid CAD442 million to grab 30 licenses covering territory everywhere but in Quebec. But barriers such as the high cost of building a service and federal rules that limit foreign ownership of Canadian companies that have telecommunications infrastructure render it a benign, though interesting, challenger.

The company is backed by two foreign billionaires, Naguib Sawiris of Egypt through Weather Investments and Iceland’s Thor Bjorgolfsson through London-based Novator Partners.

Naguib, No. 60 on Forbes’ 2008 list of the world’s wealthiest people with a net worth of USD12.7 billion, runs the Wind cell phone brand in Italy and Greece. He’s also chairman of Egypt’s Orascom Telecom, which runs cell phone providers in Egypt, Pakistan, Algeria, Tunisia, Bangladesh and Iraq. Bjorgolfsson is No. 307 on the Forbes list at USD3.5 billion. Through Novator, he holds stakes in telecommunications companies in Finland, Bulgaria and Poland.

Naguib and Bjorgolfsson both made their cell phone way by offering lower-cost service. Wind customers in Italy and Greece paid less than USD27 a month for service in 2007, compared to USD59.30 for Telus subscribers and USD55 for Rogers users.

The market gave Rogers and Telus the thumbs down during and after the auction, selling shares because they paid a lot more than anticipated to hold as much of the status quo as possible, a cash outlay that could hamper efforts to grow.

Telus and BCE are said to be close to announcing plans to overlay their current CDMA-based networks with W-CDMA/HSPA technology. The costs of the upgrade could approach a combined CAD360 million to CAD480 million, but the move makes sense because Telus and BCE rely on each other for roaming coverage across Canada; Telus’ network is concentrated in Western Canada while Bell Canada is in the east.

Establishing a new platform, even at a relatively modest outlay, on top of paying for the new spectrum makes sustaining a dividend, let alone raising it, a difficult task. The potential benefits of the technology shift–lower handset costs, more roaming revenue–are tough to measure and harder to forecast. It may get them Apple’s iPhone and smooth out some technical issues, but managing multiple networks likely means more costs.

Telus has taken a beating in the market, falling 20 percent from near CAD50 to below CAD40. The company reports second quarter results today, Aug. 8, at noon. The key numbers are wireless data revenue and high-speed Internet subscriber growth, as well as customer retention costs and churn.

Telus is also aggressively pursuing an IPTV presence; Telus TV and other broadband data content services should help grow revenues. And the competitive benefits of an overlay agreement with BCE–if nothing else, it’ll hurt Rogers, at least in the short term–aren’t too murky.   

Now yielding 4.8 percent, Telus Corp is a buy up to USD40.

Rogers has already begun deploying a third-generation (3G), W-CDMA/HSPA network.

According to Scotia Capital, Rogers’ competitors use technology that will cover only 60 percent of the country by mid-2011. Rogers is the most likely carrier to provide roaming services to the additional 40 percent of the country and the rural customers who live there.

The company has managed to reduce churn in the face of competitive price plans, new competitive brands and wireless number portability. Capital costs should come down in coming years because Rogers has already outspent rivals to broaden its network.

Toronto-based Rogers earned CAD301 million (47 cents Canadian per share) on revenue of CAD2.8 billion. Wireless postpaid net additions were 92,000 in the latest quarter, compared with 133,000 a year earlier, but churn fell to 1.06 percent from 1.15 percent; postpaid monthly average revenue per user (ARPU) rose 4 percent, driven in part by 34 percent growth in data revenue.

Rogers is forecast to generate free cash flow in excess of CAD1.5 billion; with no obvious acquisition targets, dividend increases are likely. Buy Rogers Communications up to USD38.

BCE added 111,000 post-paid mobile phone subscribers–the lucrative variety, those who sign up for years-long contracts and pay on a monthly basis as opposed to buying a set number of minutes upfront–up from 43,000 in the second quarter of 2007. Excluding onetime items, the company earned 53 cents Canadian a share, down from 56 cents Canadian a share a year earlier.

It isn’t trading on fundamentals anymore while it awaits the consummation of the CAD42.75-per-share deal that will remove it from the public market. Hold BCE until the takeover is complete.

A strong balance sheet could allow Shaw Communications (TSX: SJR.B, NYSE: SJR) to live up to CEO Jim Shaw’s boast that he didn’t see any reason why the dividend couldn’t double in the next five years. (That was in August 2007; Shaw was paying 72 cents Canadian a share annually and now pays 80 cents Canadian.) A solid foundation will also support its effort to build out a wireless network within its footprint using existing credit lines. Bundling wireless with its cable TV/Internet/satellite services gives it another way to grab pieces of customers’ disposable income.

Shaw acquired approximately 20 MHz of spectrum spanning its cable operating footprint in western Canada and northern Ontario. And western Canada–Alberta-based Shaw operates mostly in British Columbia and Alberta, with smaller systems in Saskatchewan, Manitoba and western Ontario–is the engine driving the domestic economy.

Analysts have forecast free cash flow growth in excess of 20 percent during the current fiscal year to CAD549.2 million. The board’s approval of an 11 percent dividend increase in June is a sign of confidence the company will continue to generate cash, successfully build out the new service and add to its bundle.  

Shaw reported a 39 percent increase in third quarter (ended May 31, 2008) profit, from CAD91.6 million (21 cents Canadian per share) a year ago to CAD128 million (30 cents Canadian per share). The company added 57,700 digital phone lines in the quarter and gained 32,658 digital customers, 23,185 Internet subscribers and 2,495 basic cable customers. It also added 4,686 direct-to-home satellite subscribers.

Now yielding 3.6 percent with strong dividend growth potential, Shaw Communications is a buy up to USD27.

The spectrum won by Quebecor (TSX: QBR.B, OTC: QBCRF) in last month’s auction make it the only new entrant in the Quebec wireless market. The company paid CAD555 million for its 17 licenses, to be funded by an offering of USD455 million of 10-year senior notes.

Quebecor subsidiary Videotron, which accounted for CAD182.2 million in operating income, up from CAD145.7 million, on CAD447.5 million of revenue, is the largest cable operator in Quebec. It also provides Internet, telephone and business telecommunications services. Quebecor is looking to expand its offerings to include wireless high-speed Internet and mobile telephone, completing its own quadruple play.

Videotron’s wireless prospects are bolstered by the cable operation’s growing free cash flow and stable credit lines. Execution is the key, but the Videotron name is widely known and distribution channels are well developed. It made a huge outlay for its new spectrum, but the story is now about building long-term value. Buy Quebecor up to USD34.  

Manitoba Telecom Services (TSX: MBT, OTC: MOBAF) was thought to be among the top contenders to put together a challenge to the Big Three national wireless carriers, but the consortium it put together to bid on spectrum fell apart in May. That “failure” actually gratified investors fearful that the company, which does business as MTS Allstream, would ruin its solid balance sheet in a Quixotic attempt to take on Rogers, Bell and Telus.

The company acquired 35 MHz of wireless spectrum covering 1.2 million people in Manitoba at a total cost of approximately CAD41 million, giving it the flexibility and capacity to manage future demand for 3G wireless services.

Manitoba Telecom Services, which will report second quarter results Aug. 11, remains a buy up to USD50.