The proliferation of smartphones, tablets, wearables and other internet-connected devices has fuelled demand for rapid web browsing, communication via mobile apps as well as TV shows, films, games and other entertainment on the move. That has piled pressure on UK telcos to offer high-speed wireless connectivity. The days of waiting for weekly episodes of a TV show to air are largely gone; online video libraries such as Netflix allow consumers to watch an entire series at their own pace - even in one sitting - while services such as BBC iPlayer let them catch up on content whenever it's convenient. FTSE 350-listed telecoms companies and broadcasters have raced to update their offerings and embrace these new technologies - but with mixed success so far.
Smartphones and voice-over-internet (VoIP) services have snatched away demand for fixed-line telephones. Telcos have responded by bundling landlines with mobile, TV and broadband services, boosting average revenue per user (Arpu) and discouraging customers from quitting.
The 'quad-play' trend has meant more competition for incumbents and fuelled demand for premium content. For instance, BT (BT.A) brought the fight to Sky (SKY) by rolling out a TV service, bagging the rights to Champions League and Premier League football and securing exclusive content from AMC, the home of hit dramas Mad Men and Breaking Bad.
The privatised fixed-line and broadband giant has also impinged on Vodafone's (VOD) territory by launching a rival mobile service - and its £12.5bn takeover of mobile titan EE should close soon. Similarly, Sky has partnered with O2 - which could soon combine with Three - to enter the mobile market in 2016.
TalkTalk (TALK) has taken a different tack: it continues to focus on cut-price bundles of TV, mobile and broadband services. More than 1.4m people, or 39 per cent of its customers, use all three services. Meanwhile, the enormous costs of building and operating networks, tepid trading in Europe and the growth potential of emerging markets have encouraged consolidation. For instance, Caribbean and Latin American telco Cable & Wireless Communications (CWC) looks set to be acquired by Liberty Global, owner of Virgin Media.
It's less of a tangle in the traditional television market. ITV (ITV) benefited from an improving advertising backdrop and exclusive rights to the Rugby World Cup. The Downton Abbey broadcaster is also focusing on more lucrative production, pay-TV and online content.
Satellite specialist Inmarsat (ISAT) has also bet big on humanity's hunger for data. The group launched its third Global Xpress satellite in 2015, allowing it to bring its global wireless network into commercial service. Management expects the initiative to generate $500m (£347m) in annual revenue within five years.
Inmarsat is also slaking travellers' thirst for uninterrupted connectivity: it has partnered with Deutsche Telekom to build a wireless network for European aircraft and has already inked contracts for in-flight broadband with Lufthansa and Singapore Airways.
Soaring demand for wireless connectivity and high-quality content shows no signs of slowing. But the mixed economic backdrop and the costs of adapting to technological change will make corporate efficiency and a tight hand on expenses invaluable. As the line separating telcos from broadcasters continues to blur, we expect fierce turf wars, aggressive expansion and investments and a flurry of partnerships and acquisitions in 2016.
| Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: | |
|---|---|---|---|---|---|---|
| BT GROUP | 468 | 39,133 | 14.8 | 2.8 | 13.6 | Buy, 466p, 15 Jan 2016 |
| CABLE & WIRELESS COMMS. | 65 | 2,853 | 24.5 | 3.9 | 30.7 | Await documents, 77p, 19 Nov 2015 |
| ENTERTAINMENT ONE (DI) | 153 | 654 | 6.0 | 0.7 | -37.5 | Hold, 154p, 08 Dec 2015 |
| INMARSAT | 1,054 | 4,739 | 34.5 | 3.1 | 27.8 | Hold, 953p, 10 Aug 2015 |
| ITV | 263 | 10,579 | 17.1 | 2.0 | 16.9 | Buy, 250p, 21 Oct 2015 |
| SKY | 1,049 | 18,032 | 18.7 | 3.1 | 13.0 | Buy, 1,116p, 29 Jul 2015 |
| TALKTALK TELECOM GROUP | 198 | 1,889 | 30.4 | 7.3 | -37.3 | Buy, 241p, 11 Nov 2015 |
| TELECOM PLUS | 874 | 701 | 15.8 | 4.9 | -23.7 | Buy, 1,053p, 25 Nov 2015 |
| VODAFONE GROUP | 217 | 57,572 | 39.1 | 5.2 | -5.5 | Buy, 205p, 17 Dec 2015 |
Favourites
We remain bullish on Vodafone, BT, ITV and Sky, all of which are buy tips. We're also fond of Telecom Plus (TEP), which has seen robust demand for its cheap bundles of electricity, gas, broadband and both mobile and landline telephony. Its plans to enter the insurance market this year and the water market in the future are also promising. And we recently turned bullish on TalkTalk. Although management estimates the costs of a recent cyber attack at £30m-£35m - and costs continue to rise - TalkTalk's shares trade at an enticing 10 times forecast earnings for this financial year and come with a forward yield of over 8 per cent.
Outsiders
Trading remains on track at Entertainment One (ETO) and the film and TV distributor recently formed a new production company with Stephen Spielberg and other international bigwigs. But first-half adjusted film revenues fell sharply as movie studios delayed theatrical releases, tempering strong growth in the TV business. The group also drew fire for raising £285m via a debt issue at a higher-than-expected coupon rate. And investors have sent its shares down more than half since last summer, so we recommend waiting for sentiment to recover before buying.
