Analyst: Beware the telecoms mini-bubble

Analysts have warned of an imminent "mini-bubble" as telecoms companies rush into the converged world of triple-play services.

Forrester telecoms analyst Lars Godell, who published a major report on triple-play strategies on Friday, told ZDNet UK that telcos are putting a lot of money into areas in which they were inexperienced, when customer demand was as yet unproven.

"The odds are stacked up against incumbents being successful," he said at Forrester’s Gigaworld Conference in Lisbon on Thursday. 

As reported on ZDNet UK yesterday, Godell claimed this inexperience will make it difficult for companies such as BT to move into the content arena, and predicted that it will be five to ten years before they see any returns. He was also highly critical of what he saw as an inflated optimistic view of the returns that companies would enjoy from triple-play convergence.

"Consumers have their different providers," Godell said. "They’re not going to change their providers anytime soon just because the industry is talking convergence.

"In a saturated market, you can’t expect people to just dump their existing mobile phones and get these integrated solutions. It takes a lot of education from the supply side," said Godell. "It will take several years before the hype turns to market reality."

BT, Vodafone and Orange are all developing dual-mode handsets that they say will allow users to replace their existing fixed and mobile phones.

Godell put particular emphasis on the introduction of IP-streamed television (IPTV), which his report suggests is a case of vendors selling telcos inflated figures despite a lack of success stories or, indeed, a viable standalone business model.

Jupiter Research’s Ian Fogg told ZDNet UK that telcos felt they had little choice but to diversify, saying: "Companies that are focused on a single play strategy have competitive pressure that drives them to diversify their revenue.

"Each sector raises competitive pressure in the neighbouring markets," Fogg said on Friday. "It’s a vicious circle."

Fogg added that triple-play offerings — which combine telephone, Internet and TV services — were "stimulated by the European regulatory environment" and would not "go away overnight", although he stressed that companies needed to temper their enthusiasm for triple-play with pragmatism.

Daiwa Securities analyst James Enck agreed, calling the telcos’diversification into triple-play a "huge gamble".

"Because of mobile substitution [for fixed lines] and VoIP they’ve been forced into a position where they have to differentiate what has traditionally been an undifferentiated product," Enck said.

"I have serious doubts about the returns… What a lot of investors would say is this industry needs to either reinvent itself or stop trying to be something that it isn’t and get back to being a utility."

Enck also cast doubt on the likely success of IPTV when TV viewership is already suffering at the hands of Internet surfing and computer gaming.

Further instability lies ahead in the UK’s race towards convergence because of developments in local loop unbundling (LLU), Godell said.

Referring to recent offers of "free" broadband by players such as Carphone Warehouse and Orange, he said a "bloodbath" had begun, notably with this week’s meltdown of Cable & Wireless’s Bulldog ISP.

"It reminds me of the dotcom days," Godell said. "It’s a race to the bottom… it’s crazy pricing and I don’t think the pricing is sustainable".

The spate of telco mergers and acquisitions (M&As) in recent years also came in for criticism, with Godell suggesting that they had been largely driven by investment banker and private equity greed, as well as a fear amongst telcos that they could miss out on the convergence frenzy.

"Not everybody should be buying up other companies unless there is a good strategic business reason behind it," he said. Godell highlighted Telefonica’s acquisition of O2 as being led by a misguided, "size is everything" approach.

"People seem to be heading for a mini-bubble," Godell said, in a reference to the dotcom boom and bust. He conceded that "share prices are not as high as they were, except for Google", but suggested that telcos had a "bad track record at being successful outside of their core business competencies, with very few exceptions".

"The M&A mania is worrying," Godell warned. "Too many people think convergence will happen tomorrow and there’s a lot of money to be made.  I’m sorry to disappoint them but…. it’s more about protecting existing revenues than generating new revenues."