Analysis - Europe's telcos in slow lane as cable takes the tape
PARIS/LONDON (Reuters) - Far from fearing the coming investment from Europe's telecom giants into superfast broadband, smaller cable firms believe they will still beat the big guns to the trigger.
Cable operators Liberty Global (LBTYA.O), Ziggo (ZIGGO.AS), Kabel Deutschland (KD8Gn.DE) and Virgin Media VMED.O have already stolen a march on their less nimble rivals, winning customers and investors with their expansion into broadband.
Their cable lines, designed to deliver TV to homes, have been upgraded to carry voice calls and Internet at speeds often five times faster than competing services from the telcos.
Now telecoms groups such as Deutsche Telekom (DTEGn.DE) and KPN (KPN.AS) have to play catch-up.
But after a third year of falling revenue, their stretched balance sheets will struggle to find the hundreds of billions of euros they need over the next decade to connect European homes to fibre broadband, which can deliver speeds of 30-100 megabits per second.
Unlike the cable companies, the telecoms providers, many of them former national monopolies, have been saddled with tight regulation of their tariffs and legacy business in terminal decline.
Fixed telephone revenue fell 8.3 percent last year as more people got rid of home lines, while mobile revenue fell 0.6 percent as data sales failed to make up for lower voice prices, according to telco lobby ETNO.
With dwindling cash flows and high debt, they are already struggling to keep up the high dividends that have been their single biggest attraction to investors. Some, like Spain's Telefonica (TEF.MC), have been selling assets and cutting their payouts to shareholders.
Now they need to step up their capital expenditure.
The French government has put the cost of a national fibre rollout at 25 billion euros ($32 billion), a far cry from the 2.6 billion euro France Telecom FTE.PA spent last year on infrastructure at home.
Deutsche Telekom has said the rollout will cost 60-80 billion euros to cover Germany, and an executive there admitted the group couldn't do it all alone.
Industry executives and analysts say that once telcos build out fibre they will have to price it more expensively to recoup their investments, while splashing out on advertising that convinces customers of 'the need for speed'.
In an industry where price deflation has been the norm, that would play into the hands of the cable operators by raising the profile of a service they already offer more cheaply.
"The opportunity that we have is pricing power," said Charlie Bracken, the co-finance officer of Liberty Global at a recent investor conference.
"Historically, we've seen quite a lot of deflation in voice and data prices as we've all gone for volume and market share. And I think there's a real opportunity now to see that turn around."
Bruno Grandsard, a portfolio manager at Axa Investment Management, says investors are likely to prefer cable stocks to telcos for quite some time.
"Cable in Europe has a window now where it will reap the benefits of network upgrades and rationalisation of the sector.
"Operationally, it's a no brainer that there is still five years of growth ahead in Germany, and decent but slower growth in the Netherlands, Belgium and Britain," said Grandsard.
"At the same time, the big telcos are entering into a multi-year investment phase, even as their core sales and profits are coming down. For investors, the choice is pretty clear."
The scope for growth in cable is significant. Italy has no cable at all, and only 35-40 percent of homes in France, Spain, and Austria do. The Netherlands, Belgium, and Portugal have 80-95 coverage, and Britain about half.
Telco shares trade at an average of 4.7-4.9 times 2013-2014 earnings before interest, depreciation and amortisation (EBITDA), while cable is around 7.2-7.4 times, according to bank Espirito Santo.
The five listed European cable companies are expected to post annual revenue and operating profit growth of more than 5 percent through 2015. Forecasts for telcos are for 1.1 percent and 1.4 percent drops in sales and profit, respectively.
Dividends and share buybacks, which have been cut by many telecom operators with the exception of Vodafone (VOD.L), are also expected to rise in the cable sector, albeit from a low base. Espirito Santo forecasts that Kabel Deutschland's dividend payouts will more than double to 355 million euros a year by 2018, while Deutsche Telekom's will fall 17 percent to 2.5 billion euros a year.
In Germany, the duel appears to be going the way of the cable companies. With only 69 percent of the country covered by cable, there is still plenty of room for growth.
Liberty's UnityMedia and Kabel Deutschland have upgraded their networks to hit 100 megabits per second at a lower cost than telecom rivals. Unlike Deutsche Telekom, they are not saddled with a moribund fixed phone offering or large unionised workforces.
They are not subject to the wholesale price regulation and sharing obligations that have applied to big incumbent telcos in Europe since markets were liberalised from state ownership two decades ago.
Former monopoly Deutsche Telekom now holds just 44 percent of the broadband market, while Kabel Deutschland and Liberty have a combined 13 percent share and are still growing.
UnityMedia offers TV, phone and Internet bundles at 50 megabits per second (Mbit/s) for 33 euros a month, with upgrades to 100-150 Mbit/s at 40-45 euros.
Deutsche Telekom charges 45 euros a month for a similar package, but with only 16 Mbit/s of Internet speed.
"Broadband speed really is the killer app," said Liberty's Bracken, adding that the group only saw real competition when telcos built fibre-to-the-home that could match cable's speeds, such as in the Netherlands.
Niek Jan van Damme, who heads Deutsche Telekom's German business, admitted that the group was struggling with cable competition. To cope, it plans to upgrade its old copper network with so-called VDSL technology to boost speeds to 50 Mbit/s, while slowly rolling out fibre capable of 200 Mbit/s in the next decade.
"Of course it has frustrated us that the cable companies have been snatching market share from us," said Van Damme.
"As the telecoms sector was debating regulation issues, the cable providers could exploit their (superfast) broadband monopoly without granting any access opportunities," he said, drawing a contrast with how Deutsche Telekom was required by regulators to rent its lines to rivals.
($1 = 0.7713 euros)
(Additional reporting by Harro Ten Wolde in Frankfurt; Editing by Will Waterman)
- Tweet this
- Share this
- Digg this