FTSE 350 Mobile and fixed-line telecoms: Next generation

The telecoms industry is continually haunted by the memories of the disastrous value destruction that occurred around the time of the millennium, as companies overpaid massively for second-generation mobile phone licences and mega-mergers (Vodafone (VOD) and Mannesmann spring to mind). A renewed round of 4G auctions this year raises the spectre that the telecoms' traditionally strong cash flow could again be unwisely staked on the uncertain promise of large future returns.

What might be different this time is that the technology has now moved forward to realistically allow access to data and information almost anywhere at a reasonable price, and there is still ample room to grow the market. For instance, despite the impressive growth of smartphones, they still only account for a minority of the total mobile phone market, with their relatively high cost proving a barrier to sales in developing markets where per capita income us lower.

For instance, despite the impressive growth of smartphones, they still only account for a minority of the total mobile phone market, with their relatively high cost proving a barrier to sales in developing markets where per capita income is lower.

Although industry analysts predict flat total handset shipments of around 1.7bn units last year, they estimate that smartphones accounted for 35 per cent of the total, up from 26 per cent in 2011. And these growth rates are expected to be maintained, as analysts at market research specialists Gartner and iSuppli forecast that smartphone sales will grow at 28 per cent a year on average over the next three years, surpassing 1bn annual sales by 2015. If the rumoured budget iPhone becomes a reality, it could add a further catalyst for smartphone penetration in emerging markets.

The popularity of tablet PCs is proving a boon, too, with annual sales of mobile broadband devices forecast to exceed 350m units by 2015. And, as wireless operators roll out 4G networks and devices, this will underpin demand for 4G LTE handsets - around 28m are expected to be shipped this year.

That sets up an interesting three-way battle between traditional telecoms providers, handset manufacturers and content providers, with the distinctions between the three becoming increasingly blurred. British Telecom (BT.A), for example, recently acquired the rights to rugby and football matches for its digital broadband service and the company's superfast broadband service should be available to about two-thirds of UK households within the next two years. That puts it in direct competition with Virgin Media, which has traditionally dominated the fast broadband market, and BSkyB (BSY), the heavyweight champion of UK pay TV and, increasingly, bundled telecoms services.

There can be no dispute that domestic fixed-line communications are in a steady long-term decline, though, but big telcos can still take heart from the fact that the biggest single cost in IT spending for companies, which is forecast to grow by an overall 4 per cent, is still telecoms services. Overall, that should underpin modest single-digit sales growth this year for telcos, although it will be the switchover to mobile data that forms the biggest component of this.