Last year’s financial-sector malaise quickly infected other industries, but the telecoms industry remained in glowing health. Vodafone led by example with a 32.7 per cent share price gain on the year, with emerging markets and mobile data demonstrating that giant telcos could still provide growth. For the first time in several years, growth areas weren’t entirely negated by falling sales from voice calls and other traditional services. “Legacy revenues have fallen to a point where further declines are no longer very material to the bottom line,” says Nomura analyst Martin Mabbutt.
But calculations by analysts at Citigroup suggest that telecoms shares’ outperformance was not solely driven by earnings upgrades, which were less pronounced than in 2006. “The telecoms sector’s strength has said a great deal about other sectors’ weakness,” say Citi analysts. “If telecoms outperformed for a second year in a row, it would be the first double since 1998-1999.”
BT was the only loser in the telecoms sector in 2007, its shares falling 9.5 per cent. That was partly down to accelerated local-loop unbundling, whereby rival broadband providers install their own equipment in BT’s old exchanges. Unbundling both increases competition against BT Retail and means rivals need fewer BT Wholesale lines. BT has also failed to convince the market that its nascent next-generation network will really lower costs in 2008, as the political debate around costly rumble on.
Broadband’s high customer churn rate will remain in 2008 but after so much unbundling, it remains to be seen which providers can gain the scale to make it pay. The industry will be keeping a close eye on how Carphone Warehouse’s first “free broadband” customers behave, as their 18-month contracts expire.
Struggles to generate significant cash at Colt Telecom and Cable & Wireless were balanced by frequent takeover speculation in 2007. Both themes could return in 2008. Private equity might still be down and out, but corporate deals could return now that US operators have settled down after 2005’s mega mergers. Nomura’s Mr Mabbutt also suggests that highly valued operators in India and China may use their “huge firepower” to expand in Europe. But those high valuations may seem less appealing given Vodafone’s lust for further Asian and African expansion.
