Cold Calling: The Telecommunications Industry Seems to Have Exhaled Its Last Breath, but Does It Have the Strength to Revive Itself? Cathy Hayward Traces the Demise of the Telco Business and Asks Whether There Are Signs of a Pulse. (Feature Telecommunications)

By Hayward, Cathy | Financial Management (UK), November 2001 | Go to article overview

Cold Calling: The Telecommunications Industry Seems to Have Exhaled Its Last Breath, but Does It Have the Strength to Revive Itself? Cathy Hayward Traces the Demise of the Telco Business and Asks Whether There Are Signs of a Pulse. (Feature Telecommunications)


Hayward, Cathy, Financial Management (UK)


Telecommunication companies (telcos) and their shareholders have had a rocky ride over the past year. The industry, which peaked in spring 2000, when telecoms shares sold like expensive hot cakes and everyone dreamt of making millions, has been brought to its knees. Over the past 18 months the nine largest listed telecoms firms have lost 245 billion [pounds sterling] in value after average stock market falls of 60 per cent. Many have plummeted out of the FTSE 100 index; about 300,000 jobs have disappeared; and there have been high-profile management restructuring drives throughout the industry--notably at Marconi and BT.

According to Michael Grenfell, telecommunication and competition partner at law firm Norton Rose, the general downturn in the economy contributed to the meltdown--the cost of which has exceeded the combined annual value of the Swiss and Irish economies. "Every industry has been affected one way or another, and the situation was exacerbated by the terrorist attacks in the US on 11 September, which aided the onset of a recession," he explains.

In addition, the telcos' strong relations with dotcoms helped to precipitate their collapse, Grenfell argues. "Telcos are part of the same pie as dotcoms. When dotcoms started to go under, they dragged telcos with them."

Tony Kremer, principal consultant at telecoms consultancy Cartesian agrees. "It's a ripple effect. Dotcoms were the first to be affected, then their suppliers had problems and it rippled through the technology sector." Almost 90 per cent of the dotcoms which were supposed to deliver increased traffic through the telecoms networks have gone bust.

But Kremer also claims that flaky business plans are to blame. "Firms were spending money as if it were going out of fashion, but they were earning far less than they had anticipated in their business plans," he says. "When investors started asking questions, the answers weren't good. The industry said it would take longer to put the new generation systems in place, but claimed the revenues would be greater. It couldn't prove it, so investors, already burnt by the collapse of the dotcoms, pulled out."

It didn't help that some firms deliberately inflated their expected revenues. Deutsche Telekom, for example, is being investigated for overstating its property assets by almost half.

In retrospect, the telecoms sector was like any other utilities business until the arrival of the technology boom. The growth of the internet, coupled with deregulation, seemed to offer unlimited, if ambiguous, possibilities. Firms created new business models and took on more debt, reasoning that increased revenues would fund the borrowing; but the revenues didn't materialise.

The opportunities were so appealing that hundreds of new firms entered the market and there was not enough business to go round. "Telcos failed to recognise that mobile phone sales will naturally tail off as the market reaches saturation point," Kremer says. "Not everyone in the UK wants or needs a mobile phone and people won't upgrade every year."

Just as revenues were below target, outgoings rose higher than expected. The cost of building essential high-speed internet networks proved to be frightening: cable operator NTL spent 11 billion [pounds sterling] constructing a network in the UK; Telewest spent 4 billion [pounds sterling]; and BT spent 5 billion [pounds sterling].

An already difficult situation was made even more precarious when telcos were laden with further debt after buying third generation (3G) licences from the government. Orange, Vodafone, One2One, BT and TIW (Telecommunications and Wireless Company) paid 22.5 billion [pounds sterling] for the radio spectrum they needed to broadcast high-speed internet services over mobile phones.

"This is main reason behind the telcos collapse," Grenfell argues. "The major telecoms firms spent billions on 3G, but had no way of knowing whether it would catch on. …

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Cold Calling: The Telecommunications Industry Seems to Have Exhaled Its Last Breath, but Does It Have the Strength to Revive Itself? Cathy Hayward Traces the Demise of the Telco Business and Asks Whether There Are Signs of a Pulse. (Feature Telecommunications)
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