Serious Money: With so much competition and ongoing technological advances, only telecoms companies that are preapred to innovate will survive the pace, writes Chris Johns
BT, the old UK telecommunications monopoly, has seen the future and, like many other old-fashioned providers of fixed-line telephone calls, thinks it is called broadband.
BT has an important similarity with Eircom in that it lacks a wireless business: the UK operator felt forced to sell its mobile subsidiary in 2001, mostly because of a large and growing debt mountain.
BT's share price soared in the telco bubble of the late 1990s, reaching stratospheric levels in March 2000, when it stood at something around six times today's level of just under £2.
While the company's share price has been languishing, a new(ish) chief executive has been fighting the same headwinds afflicting almost every other legacy phone business: new technologies, competition and regulation are all posing potent threats to revenues.
Although not as big as in the US, VOIP (internet-based phone calls) technologies are starting to grow, ongoing switching from fixed line to mobile calls will only increase as regulators force down the prices of wireless calls and fierce price competition from start-ups across all segments of the business is merely the icing on the cake.
BT's response to all this is a plan to have most - or all - of its subscribers on broadband within the next four years. Why the rush? Chief executive B.J. Verwaayen is quite explicit and admits that the lack of a wireless subsidiary means that the company has to go for broke in the only area that it can.
Internet-based phone calls probably offer the most significant long-term threat to traditional phone carriers (and, eventually, maybe even to wireless operators). For VOIP calls to work well, users need a broadband connection: this is one of the strategic factors behind the rush to broadband.
BT is the first company in Europe to offer a comprehensive range of broadband services that includes the facility to make internet phone calls, albeit with some limitations. The new Communicator product, introduced last month, allows subscribers to make free internet calls to other Communicator users.
BT also has plans for another innovative product, Bluephone, which aims to provide a kind of integration between wireless and fixed line. Customers will have a wireless handset that operates in the traditional way except when they have access to a wireless broadband connection, in which case the phone will switch to the cheaper fixed-line network. Often that connection will offer free calls so, while this may be attractive to customers, it hardly seems to offer scope for significant revenue growth.
BT's share price has responded to all of this in a very muted fashion - but even that might be thought of as positive. BT has outperformed the FTSE100 over the past few months, which isn't anything to get too excited about given the lacklustre performance of the broader market. But the fact that the share price has stopped falling might be a signal that the market judges all of BT's innovation to be just about sufficient to stop any further significant erosion of revenues - they might allow the company to stand still rather than decline further.
The message here is stark: if incumbent telecoms companies want to prevent their share prices from falling from current levels, they are going to have to be as imaginative and innovative as BT.
But even that strategy might not be enough. The drive to get as many customers onto broadband is hardly unique to BT and almost every country around Europe sees new entrants forcing prices down. Internet telephony is growing rapidly in the US and Europe is likely to follow soon.
In the US, two key developments have got industry watchers excited.
Earlier this year, the telephone regulator ruled that an internet phone call is really an e-mail - if it were a normal call it would attract all sorts of regulatory charges. So internet telephony will remain super cheap compared to the existing alternative.
Secondly, some people think that Microsoft could be about to introduce products designed to turn every PC into a phone via the Windows operating system. Such a development would mean VOIP would rapidly make the transition from niche to mass market.
In the face of such technological, regulatory and competitive onslaughts, I think it mildly surprising that some telco share prices have managed to tread water. The explanation is, I think, that with dividend yields still attractive and, for the moment, supported by strong cash flow, it is easiest to adopt a wait-and-see attitude. Many of the threats remain over the horizon so they can be ignored for now.
Anyone following this strategy will, I believe, come to regret it. While there will be winners amongst existing telco companies, there will be far more losers.
Companies with dynamic management who are clearly trying to be different might be worth a bet. BT comes to mind but the list is not a long one - and it doesn't include Eircom.
Eircom's share price has languished since flotation, not least because of its lack of a wireless business. But, like all telcos, the threats it now faces to its revenues, and the ones waiting over the hill, mean that it is going to be hard to stand still, let alone achieve meaningful growth.
Eircom is a classic example of a company that offers a wonderful dividend amply covered by strong cash flow. But the market is almost certainly playing a game of chicken: some holders of the stock are probably convinced that they will be first to spot signs of stress and believe they will be able to exit before anyone else. And that time may still be a long way off.
Like a lot of such games, this one will probably end in tears. Best to sell now in my opinion.
