Telecoms Bet on New Services to Boost Sales
Dana Urquhart bought her first mobile phone eight years ago just to make calls. Her brand-new handset also serves as an agenda, a camera and a video recorder.
Her bill has increased too. In the last year, it has doubled to an average of $150 a month, said Urquhart, a 31-year-old British national who works for a computer-services company in Madrid.
“I never thought I was going to be using it so much,” she said, while using her phone to take a picture of her 20-month-old nephew. Urquhart’s bill is four times that of the average client of Telefonica Moviles in Spain.
Telefonica and other European operators, including Vodafone Group, the world’s biggest wireless company, need clients who are willing to spend more on handsets and services.
Signs that new services may lead to increased revenue are helping restore some of the investor confidence shattered after companies spent more than $100 billion on mobile phone permits in 2000, which led to record losses and debt.
Some analysts remain wary. Commerzbank in a Jan. 22 report said reasons for an “overweight” rating for the industry had disappeared after recent share gains.
Others are more optimistic. Merrill Lynch & Co. analysts, in a Feb. 9 report, reiterated their “overweight” stance for the European wireless industry, citing the potential for “better than expected top-line growth.” Last month, Morgan Stanley & Co. raised its European mobile phone industry recommendation to “attractive” from “in line.”
‘Value for Investors’
Vodafone shares rose 20% in the last 12 months, while Telefonica Moviles stock climbed 51%. The Dow Jones Europe Stoxx Telecommunication index advanced 29% during the same period.
“The European wireless industry is starting to show increased growth prospects and there is value for investors,” said Augusto Caro, who helps manage the equivalent of $12 billion at Gesmadrid in Madrid, including shares of Vodafone. “After the rally in Telefonica Moviles shares I see more value in Vodafone’s stock.”
Investors such as Caro will be monitoring remarks by Vodafone Chief Executive Arun Sarin and Jorma Ollila, CEO of Nokia, the world’s largest mobile phone maker, and other executives at this week’s 3GSM World Congress in Cannes, France.
Madrid-based Telefonica Moviles, a unit of Telefonica, said last week that its sales in Spain rose 11% in 2003, with average monthly revenue from data services per client advancing 8.8%.
Telefonica Moviles posted a $2-billion profit last year, reversing a $4.6-billion loss in 2002. Deutsche Telekom, Europe’s largest phone company, is expected to report for 2003 its first full-year profit since 2000 as revenue from its T-Mobile International wireless unit advances, according to a Thomson Financial poll of analyst forecasts.
To revive profit, operators sold assets and cut jobs. BT Group, Britain’s biggest phone company, spun off its mobile phone unit MM02 in November 2001 to reduce costs and borrowings after an expansion into Asia, Europe and the U.S. boosted debt to $53 billion as of March 2001, more than three times that of the previous year.
Now investors are favoring shares in other phone operators over those of BT, this year’s second-worst-performing stock in the Dow Jones Europe Stoxx Telecommunication index with a 3.3% drop. The index uses the euro as its base currency. Revenue at London-based BT declined in the last three quarters from the same periods a year earlier.
Shares in MMO2 rose 19% over the same period. Telefonica shares advanced 13%, the same increase as Deutsche Telekom.
In Western Europe, the number of active wireless lines at the end of last year was equivalent to 84% of the population, according to a forecast by Ovum, a British-based telecommunications research and consulting company.
As the prospect of gaining clients diminishes, operators are rolling out data services, such as games or the ability to download information from the Internet with handsets, to fuel growth.
In the U.S., 53% of the population had cellphones at the end of 2003, Ovum estimated, leaving more room for growth from the addition of clients. Those wireless growth prospects drew Cingular Wireless and Vodafone into a bidding war for AT&T; Wireless Services Inc., the No. 3 mobile phone company in the world’s largest economy. Last week, Cingular, based in Atlanta, outbid Vodafone with a $41-billion offer to buy AT&T; Wireless and create the biggest U.S. mobile telephone company.
Third Generation
Newbury, England-based Vodafone is betting on growth from data services. Last month, the carrier said subscribers to Vodafone Live, which offers games and Internet access, spent an average of 7% more than those without the subscription. With the new services, Vodafone and competitors are also laying the ground for the arrival of so-called third-generation technology.
“Investors are starting to get a vision of what data can add to revenue with wireless services and that is starting to come through,” said Ralf Oberbannscheidt, who helps manage $156 billion at DWS Investments. “Current users are increasing what they spend more than we thought.”
Mobile phone operators in European countries including Germany, Spain and Portugal have pledged to start the new services, which will even allow users to hold videoconferences, this year. The third generation, or 3G, is based on the Universal Mobile Telecommunications System, or UMTS, and allows handsets to transfer more data at a faster speed.
Vodafone and Telefonica Moviles this month started selling a 3G data-card service that allows customers to access the Internet with their portable computers over wireless connections at speeds as much as 10 times the rates previously available.
The introduction of the services this year may hurt smaller wireless operators, such as Spain’s Amena or Italy’s Wind, as bigger companies can distribute the cost required among a wider client base, analysts at Morgan Stanley said in a January report.
The “window of opportunity appears to be closing” for smaller operators to gain market share from bigger companies, the Morgan Stanley report said.
The increased spending by clients coincides with some telecommunications companies returning to profit after writing down the value of licenses and acquisitions carried out at the height of the technology boom, when investors were willing to pour money into the industry betting on growth prospects. In Germany, six wireless permits were sold for $63.3 billion in August 2000.
Prospects Improving
“What was paid for the UMTS licenses was excessive,” Caro at Gesmadrid said. “Now companies have had time to recover, and slowly the prospects are improving. We are starting to see some indications of what the value of the new services can generate.”
BT CEO Ben Verwaayen, two years in the job last month, is trying to counter the sales drop with computer services, high-speed Internet access and voice calls over the Web. He also boosted dividends and started buying back shares.
“What differentiates one investment from another is not only shareholder remuneration. I also look for top-line growth,” Oberbannscheidt at DWS Investments said.
To ensure growth, Paris-based France Telecom, Europe’s second-biggest telephone company, made an $8.27-billion bid in September to buy the stake it doesn’t already own in its wireless arm, Orange.
