Analyst: 'Investors Hate Euro Telecom'
Enck says the investors he deals with have too many doubts about the business health of Europe's national telecom operators. And the reasons for those doubts are legion.
One reason is the growth of VOIP. Enck notes that Orange (NYSE: FTE) predicts that, by the end of 2006, up to 40 percent of consumer fixed-line traffic in France will be VOIP, compared with 14 percent at the end of 2005. The rapid growth in VOIP has already hit the incumbent's forecasts and dented its share price (and subsequently those of other national carriers) earlier this year, resulting in the sacking of the CFO. (See FT Warns, Europe Quakes and France Telecom Gives CFO Le Boot.)
There's also concern about the scramble into IPTV by the major operators. "Investors are concerned about whether consumers will want this stuff," says Enck.
And the impact of cross-sector convergence is also negative for the traditional telcos. "There were long faces at BT Group plc (NYSE: BT; London: BTA) when Sky decided to buy aggressive unbundler Easynet Ltd. ," says the analyst. "BSkyB got the broadband religion and scared the hell out of everyone else." (See Murdoch's Sky Takes on BT.)
Then there's the "nuclear arms race in access," with initiatives such as municipal fiber-to-the-home network buildouts in major cities such as Vienna, Paris, Amsterdam, Rotterdam, and many more towns in the Netherlands and France. "Investors are wondering whether the incumbents will even own the access network in the future!" (See Amsterdam Fires Up Muni Broadband, PacketFront Gets $27M Deal, Eyes IPO, Dutch Do FTTH With PacketFront, and Paris Plans FTTH Network.)
Add to that the impact that the likes of Google (Nasdaq: GOOG), Yahoo Inc. (Nasdaq: YHOO) and other Web-based companies are having on traditional telco business plans, and it all paints a very black picture for Europe's incumbents.
So what has been the reaction of the large carriers? They're buying more network in other countries, notes Enck, and, in an effort to act as a single unified entity, are buying back assets they'd previously spun off years ago. (See Telecom Italia to Buy Tiscali France, Telenor on Billion-Dollar Spree, Telefonica Buys Cesky Telecom, FT Takes on Telefónica, Telefónica Swoops In on O2, Telefónica to Eat Its Mobile Arm, and Euro Giants Buy Back Offspring.)
But what's the end result? These carriers "may emerge as the winner, but what will you be top of? That's what investors are asking" as the incumbents expand rapidly into their neighboring territories.
It's clear the carriers are at least starting to reevaluate their position in the communications food chain. What they need to do, analysts say, is follow the example set by some of the major media companies, including ITV plc (London: ITV), which acquired Friendsreunited.com, and Rupert Murdoch's News Corp., which acquired Myspace.
"Big media companies are buying online properties that capture users' attention," notes Enck. And that's what the carriers need to do, too. "It's all about voice as a feature, not as a service, and capturing people's attention, their time."
That would require quite a significant change in strategic outlook, though, and Enck believes that, while the major carriers can see there's a crisis enveloping their position in the industry, they believe it's a ways down the track instead of right in front of their noses. "They're risk averse and still steeped in a silo culture," and that's something they need to shake off, reckons the analyst.
— Ray Le Maistre, International News Editor, Light Reading