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  Shaw rallies behind Wi-Fi, avoids cellular

BENJ GALLANDER and BEN STADELMANN

Friday, May 25, 2012

After a few months of welcome respite, the turmoil in Europe is back on the front burner with a vengeance. The stock market's reaction following those lovely gains in the first quarter are reminiscent of the wicked witch, "Look what you've done! I'm melting, melting! Oh, what a world!"

Under these adverse conditions, investors are looking for defensive companies at a reasonable price that can generate steady income. One component of the Contra Vice-President's Portfolio that might be a candidate in this regard is Shaw Communications.

Shaw's stock price held up pretty well during the Great Recession. It turned out that in those hard times few consumers cut their cable — it's easier to give up other types of discretionary spending and stay home to watch television.

A key issue in evaluating Shaw is its competitive position, and the long war with rivals. One concern is the encroachment by Telus with its IPTV offering on Shaw's home cable/satellite turf. As recent quarterly results for both companies attest, this battle heated up last winter with aggressive discounting and customer freebies that ended up being expensive for both sides.

Shaw was successful in stanching the erosion of subscribers, but at a cost of knocking about $100 million off guidance for free cash flow this year.

An important strategic announcement for Shaw was the shelving of its plan for a wireless network and going the Wi-Fi route instead. It is one of those corporate decisions that has polarized opinion, from analysts, industry insiders and consumers alike. Depending on who you listen to, the shift is either a prudent move to sidestep the competition, or dumber than a bag of hammers.

Essentially, Shaw has decided to concentrate on a two-front war, rather than open a third. With the hard-fought action over television with Telus now at a stalemate, it is on the Internet broadband flank where Shaw is girding defences, perhaps even taking the initiative.

Customer service has been expanded and is now offered 24/7. Subscriber loyalty is also the theme for the rollout of Wi-Fi access to customers in busy parts of Vancouver, Edmonton and Calgary, just like the folks in New York, Paris and London already enjoy. The capital budget is modest, about $50 million for 2012.

The overriding issue that is emerging in the mobile sphere is capacity. There is only so much spectrum to go around, and though 4G LTE networks are brisk, Wi-Fi is capable of four times the speed. Meanwhile, smartphones and tablets, especially the fancy toys that Apple aficionados so adore, are data hogs. Those crystal-clear pretty screens are only possible due to their amazing resolution, and every pixel needs data, which must be transmitted through the ether.

For the mobile carriers, that swelling demand is both blessing and challenge. It's great because they can sell expensive data plans to their customers, but handling the torrent of data traffic is a problem that will only get tougher as the popularity of these devices grow. Already some carriers suggest their subscribers download as much as they can on broadband, so that they can watch it later without eating into their mobile quota.

Breaking into the big three's lock on mobile phones would be hideously expensive for Shaw. The incumbents are well entrenched — just ask upstarts Wind Mobile and Mobilicity how easy it is to take the bread out of the big boys' mouths. The Wi-Fi option isn't ideal, but at least it avoids head-to-head competition. If it can provide consumers with an alternative way to access the Internet on the go, it will create value.

For years, Shaw has been the subject of takeover speculation. Rogers was suggested as the most obvious partner to create a cable giant, but a combination with BCE would also increase its presence in the fastest-growing provinces of Canada. Telus is the only one of the majors that is not vertically integrated as a content provider. Shaw's $2 billion acquisition of the former Canwest Global TV stations last year would cover this vulnerability very nicely.

Any such buyout would need not only the agreement of the Shaw family, but would guarantee close examination by regulators. How such an endgame would play out is unpredictable, but for the time being, one insider has made a big bet that the stock is an attractive buy. Last month, the elder Shaw plunked down nearly $2 million to buy 100,000 of the "B" shares.

Given the ludicrous pension plans for J.R. and his two sons, he definitely doesn't need the retirement income. Nonetheless, it is encouraging to see the founder adding to his "A" voting shares by slumming with us commoners.


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