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NewsGlobe: Financial
Telecom Finance in 2006
Will They Party Like it’s 1999?
by Ouida Taaffe
There is a story that goes round among telecom journalists –
hopefully apocryphal – about an altnet party in 1999. This
drinks-do had a very well-stocked, and free, bar. However,
the bar itself, which was covered in a white cloth, seemed to
be an odd shape. “What’s under there,” someone asked,
lifting up an edge of the cloth. “Oh, it’s just a switch we
bought,” was the host’s happy answer.
Things have changed a little since then. The money gushing
into telecom dried up and purchases of equipment became
tied to real, rather than imaginary, revenue gains. This meant
that, where, in 2001, capex at European operators had grown
to be as much as 20 per cent of revenues, it shrank to
around 8 per cent during the bust, estimates John Yeomans,
director of First Capital, a speaker at the up-coming
TelecomFinance conference,
which takes place in London on January 26-27.
The conference and its awards ceremony are a pow-wow for
those who specialise in financing the telecom industry.
Telecommunications® International will be providing online
coverage of the event.
Most European telecom operators are now generating cash,
and have greatly reduced debt, which – in turn – means that
they, and many vendors, have money to spend. What are
they likely to do with it?
“There are fundamental economies of scale in the telecom
industry,” says Yeomans, though he stresses that one size
does not fit all. “As soon as you move into value, rather than
volume, what matters is quality and not scale,” he says. Still,
for telecom operators he expects to see further geographical
extension among the largest players and consolidation or
acquisitions among those that are sub-scale, which he says is
usually anything under 15 per cent market share. Companies
that, at some stage, are likely to either be sold or to set up
strategic partnerships, include, in Yeoman’s view, Telekom
Austria and Swisscom. “But small can be beautiful in
telecom,” he says. “Telenor is leading edge.”
Yeomans likens this M&A manoeuvring – and TelecomFinance
points out that there was over US$1 bn worth of telecom M&A
in 2005 – to a game of monopoly where players build
up ‘sets’. Then, he says, they move to the stage of knocking
each other out, which does sound like it could be another
busy year for the bankers.
There should also be plenty of work for others in the M&A
advisory and VC space – that inhabited by First Capital itself –
if Yeomans is right. “There are still a lot of opportunities to
come into the telecom market thanks to the massive
transition caused by the shift to IP,” says Yeomans. “The
whole architecture of modern-day networks is designed to
separate the physical architecture form the application. The
whole idea of IMS is to be able to add new applications on top
and the market will be open for this.”
This shift will also have implications for the end-user
device. “The PC has gone as far as it can,” says
Yeomans. “The question now is how to make the transition to
the market volume the TV commands.” Yeomans believes
that search will be a key facility in the shift away from the PC –
which obviously gives a great deal of power to companies like
Google. “I think the entry barrier to search is high, you have
got to start with such a range of content now,” says Yeomans
on the question whether Google could be displaced, “though
the dymanics may be different in a language-specific market
such as China”.
Yeomans sees little rationale in companies like Google
acquiring networks. “Telecom operators run networks well and
the investment in infrastructure is so great that I think that
investment will stay separate. Also, why constrain yourself if
you can work across networks?” says Yeomans.
As these remarks suggest, Yeomans anticipates great change
in the telecom market. “There will be a massively fast
displacement [of switched services] in the next 2-3 years,” he
says. He does not, though, expect service providers
to ‘bodge’ the transition by running IP over, say, SDH. “There
are further economies to be had in merging voice and data
[over pure IP]. I have seen figures where costs are taken
down another 20 per cent,” he says.
For the full finance industry take on the challenges that the
telecom industry faces, follow the reporting from the event, or
register for the conference here
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