Talks try to ring changes in telecoms

The mood was sombre in Barcelona as the managements of the leading telecommunications groups lined up to explain to investors why the value of their companies had taken such a pounding in recent months.

There were few that managed to brighten the atmosphere at the conference, even if there was hope that the worst was over for a European sector trying to navigate its way past an unprecedented combination of structural, economic and regulatory obstacles. "Everyone is selling," said one hedge fund investor. "It hasn't been this downbeat for years." More News From Financial Times
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The clear message from three days of presentation was that the growth of mobile data has yet to offset declines in traditional voice and text revenues. Carsten Schloter, chief executive of Swisscom, warns that the introduction of communications over the internet has "rendered all local telco models subject to global competition". The industry needs to move to the business of selling internet access, he says, and try to generate extra revenues from quality of service, security and cloud applications. "We are not there," he says. "Nobody is there. There is an erosion of old business that is partially compensated by the new access business. It means restructuring on one side and investing for the future on the other." "There is a mix of structural and economic issues," says Vittorio Colao, Vodafone chief executive. "More people are adopting data, which is good, but that comes at a short-term cost." The week began with a deep pre-tax loss for Vodafone, but this was just one of a number of poor recent results for investors to digest. Nick Delfas, Morgan Stanley MWD analyst, says the combination of price cuts and the need to increase investment has put "immense stress" on free cash flow. "I don't think there is a company at the conference that hasn't had to cut guidance one way or another." Telecoms were seen as safe havens for cautious shareholders seeking cash from virtual monopolies, but this is changing. Previously high margins have been crunched, as competition intensified for traditional business in recession-hit markets. The slow-moving industry has also only gradually woken up to the danger in being left behind by technology companies that use, but do not necessarily pay for, access to telecoms infrastructure. On Friday, ETNO, the telecoms lobbying group, reported a decline in industry revenues of 1.5 per cent in 2011 to USD 274.7 billion - the third consecutive annual fall. Europe's share of the global market fell to 25 percent, from 31 percent six years ago. This partly reflects better conditions outside Europe, with US companies posting strong results as they forge ahead with next-generation networks that have bolstered already higher tariffs. Likewise in Australia. David Thodey, chief executive of Telstra, remarked: "Our business is going well; I realise that must sound unusual for you in Europe." In Europe, a broadband market revenue increase of 4 percent in 2011 was not enough to offset a decline in fixed telephony revenues of 8 percent, with mobile revenues down 0.6 percent. Network investment continued to expand by 4.6 percent in 2011, and companies say more investment will be needed to roll out future fibre and 4G mobile networks. Such pressures could result in consolidation, but European regulators have prevented many mergers with an insistence that customers are best served with at least three, and normally four, operators. Several chief executives bemoaned the fact that there were just four national operators in the US market - or "two and two halves" as one remarked - but more than 100 across Europe. Companies such as Telefonica and Telecom Italia are selling assets to reduce huge debts built up in decades of global expansion. Cutting costs remains a priority, including the sharing of infrastructure. Angel Villa, finance director for Telefonica, says: "It doesn't make sense to have so many networks in so many countries". There are other strategies. Vodafone, for example, is exploring commercial content partnerships, while Telefonica wants to build its own digital services to stem the flow of profits to Silicon Valley. Gervais Pellissier, deputy chief executive of France Telecom, predicts better results in the medium term, pointing to sensibly priced auctions of 4G spectrum that did not fragment the market further. Mr Pellissier is optimistic about future earnings given recent proposals by the European Union to allow flexibility over pricing of wholesale access to fibre networks. "I am trying to see a little blue . . . in the still very cloudy sky," he says. "There are the basics to generate some earnings growth again." For investors, there at least is the promise of longer-term growth on the back of high-speed networks. That, however, will probably come only after further pain for European groups as they restructure businesses for the digital age.